South Korean stock market at three-month low as AI sell-off intensifies

The sell-off in AI stocks has intensified, driving South Korea’s stock market down to its lowest level in three months.

Investors continued to ditch chip stocks on Tuesday, amid rising concerns about the huge amount of borrowing among AI companies to fund their datacentre expansion plans.

The South Korean semiconductor companies SK Hynix and Samsung Electronics fell by more than 10%, dragging the country’s Kospi share index down by 11.5% to its lowest point since mid-April.

US chip stocks extended their recent losses when Wall Street opened on Tuesday, with Intel, Advanced Micro Devices, Sandisk, Western Digital Corp and Seagate Technology all down by more than 4%.

The Nasdaq 100 index of leading tech stocks fell by as much as 1.8% at one point, briefly taken into market correction territory with stocks more than 10% below their early June record high. They later rebounded to settle roughly flat on the day.

Apple bucked the trend, rising to briefly become the second ever company to pass the $5tn (£3.76tn) valuation mark as investors losing confidence in AI stocks sought a safe haven.

Analysts attributed the tech sell-off to renewed worries over AI investment spending, and competition from cheaper Chinese companies, after a report by The Information that China had begun mass production of homegrown deep ultraviolet (DUV) chip-making tools.

“We believe the market was likely spooked by the progress of China’s chip-making equipment capabilities, and was worried that this progress would threaten the competitive position of global chip making and chip equipment leaders,” said Jing Jie Yu, an equity analyst at Morningstar, adding that the sell-off was “largely a kneejerk reaction and overdone”.

On Monday, shares in the Chinese memory chip maker CXMT rose by 466% when it floated on the Shanghai stock exchange, underlining China’s drive to create its own AI supply chain.

Investors may also be growing jittery about the “circular funding” at the heart of the AI industry, through which artificial intelligence firms finance one another.

On Monday, the Wall Street Journal reported that Nvidia was in discussions with OpenAI about providing $250bn (£188bn) for a massive datacentre project in Ohio. Backing from Nvidia, which has an investment grade credit rating, could make it less expensive to raise funding for the project.

News of the talks knocked Nvidia’s shares on Monday; they closed 5% lower, while the cost of insuring the chip company’s debt against default using a credit default swap (CDS) rose.

“The market reaction to the Nvidia news was swift. Nvidia fell 5% and closed the session below the $200-per-share mark. More importantly, Nvidia’s five-year CDS spiked, suggesting that it may not yet be the right time to buy the dip,” said Ipek Ozkardeskaya, a senior analyst at Swissquote.

Some analysts have suggested that Beijing, trying to win a tech war with the US, is providing US companies with cheap AI systems, undercutting attempts by Anthropic, OpenAI, Microsoft and Google to dominate the spread of AI tools.

Danni Hewson, the head of financial analysis at the stockbroker AJ Bell, said investors were braced for more AI companies to warn about their outlook, further undermining confidence in the sector.

“Nerves about the huge amount of cash being splashed have been building for months. Investors will be keen to hear how those massive sums of cash have been utilised by mega caps like Microsoft and Meta and, crucially, what returns are being made on those investments,” she said.

“Chip stocks have once again led declines as the market flexes, some companies like Amazon are upping their own chip capabilities, and China’s CXMT stock market debut has cemented fears about a lost market for US companies constrained by trading restrictions.”

London and European exchanges bucked the trend on Tuesday. The FTSE 100 index of leading UK companies rose 89 points to 10,871 while the Paris CAC 40 edged 52 points higher to 8,458.