A sell-off in semiconductor and memory chip stocks across the globe has resulted in shares of SK Hynix, once the posterchild of the AI rally in Asia, to plunge nearly 60% from their record high levels, just four months earlier. The fall has shown the exodus of investors from the heated Korea trade, which has taken the benchmark KOSPI from record high levels to bear market territory within months.
Worries over whether the Fed will hike rates again after the recent September inflation print, and funding difficulties coming to the fore for many AI companies has triggered this widespread sell-off.
At the highs in June, SK Hynix shares had surged 1,000% over a 12-month period as investors flocked to memory chip trades as the AI theme gained momentum. That took KOSPI to record high levels, triggering a frenzied leverage trade melt-up, which saw an equally swift meltdown when the trade began to unwind in July. Since then, SK Hynix shares have lost more than $660 billion in market capitalization.
Trading on the Korean benchmark KOSPI has resumed after it had been halted for 20 minutes after the index plunged 8%, thereby triggering a circuit breaker on Thursday, October 15. Japan’s Nikkei is also trading with losses of nearly 5% dragged by names like Ibiden Co. and Kioxia Holdings Corp.
Adding to the fears of further rate hikes by the Fed due to higher inflation, are concerns surrounding CoreWeave and Oracle, as the former’s bonds fell to levels that typically indicate distress. The company’s bonds, priced at coupons between 9.5% to 10%, saw yields surge to as high as 15%, prompting Elon Musk to repost the same with a “Yikes” remark.
According to Hebe Chen of Vantage Global Prime, the Korean market is becoming the shock absorber for the global AI sell-off, due to CoreWeave’s funding troubles, hotter than expect inflations, and questions over the sustainability of the AI spends. This is pushing investors to further unwind positions in Samsung and SK Hynix.
With Thursday’s 8% fall, the KOSPI is poised for it seventh straight day of losses and is headed for its lowest closing level since early April. Foreign investors have been dumping shares in South Korea, having sold $1.8 billion at the KOSPI on Thursday morning itself, taking the total October selling past $10 billion.
The selling has made the KOSPI’s valuations fall to less than 5x forward earnings, a drop of more than 50% compared to a year earlier. Yet, with the bearish sentiment, fund managers are calling for caution.
“The South Korean stock market’s valuation has dropped to an extreme level now,” said Kang DaeKwun, chief executive officer at Life Asset Management. While any pullback from the current level can be considered as an entry point, investors must make sure that problems over tech funding are resolved, he added.
(With Inputs From Agencies)