South Korea’s equity market is absorbing the worst of a worldwide AI-driven selloff as investors debate whether enormous technology outlays will generate returns and fret that stubbornly high interest rates will raise the cost of sustaining the boom.
On Thursday, the benchmark Kospi index tumbled 8%, while Samsung Electronics and memory-chip competitor SK Hynix dropped 11% and 12%, respectively. The decline triggered an early-session trading halt.
The slide followed a technology-led rout on Wall Street Wednesday after hotter-than-expected U.S. inflation data rekindled worries about higher rates.
But South Korea’s challenges extend beyond interest rates.
Investors are increasingly questioning what premium to assign semiconductor shares, even though the companies’ earnings outlook stays relatively robust.
Doubts about the profitability of leading AI firms and their growing dependence on outside financing were prompting investors to reassess how they value chipmakers, wrote Mingyu Kim, an analyst at KB Securities, on Wednesday.
“Concerns over the sustainability of AI investment beyond the next 12 months have prompted the market to revert to valuing semiconductor stocks as commodity-driven cyclicals,” Kim wrote.
Even blockbuster earnings have failed to calm nerves.
Last Thursday, Samsung Electronics projected a nearly ninefold jump in third-quarter operating profit, yet its shares have since shed almost a fifth of their value.
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Competition presents another worry. Chinese chipmaker CXMT plans to launch a new server-memory product by year-end, fueling fears that increased supply could pressure chip prices.
Meanwhile, foreign investors offloaded more than 12 trillion won of South Korean stocks on a net basis in October, according to KB Securities. Buybacks by Samsung and SK Hynix, which had helped prop up the market since August, are also tapering off, leaving fewer buyers to cushion the decline.
The latest selloff adds to a year of extraordinary swings in South Korean equities.
The Kospi more than doubled in the first half before plunging 22% in July, its worst month since the 2008 global financial crisis.
The index has fallen about 35% since the end of June, going from the world’s best-performing major market in the first half to its worst performer in the second.
Still, KB Securities sees a potential buying opportunity as the market hunts for a floor.
“We believe the market is currently searching for the second bottom of a W-shaped recovery,” Kim wrote.