South Korea Chip Rout Deepens as AI Boom Shows Cracks

The red-hot artificial intelligence trade that has dominated global markets for months suffered a sharp reversal this week, with South Korea's semiconductor-heavy stock market bearing the brunt of a brutal sell-off. The Kospi index tumbled 5.5% on Friday, its worst single-day drop in months, as investors fled chip stocks following a disappointing earnings report from Broadcom that sparked a rotation into defensive sectors.

South Korea's two largest chipmakers, Samsung Electronics and SK Hynix, were hammered, closing down 6.4% and 9.9% respectively. The sell-off was not confined to Asia; it spread to Europe and the United States, with the Stoxx 600 technology index falling 2.8%, Infineon Technologies losing 9.1%, and Nokia sliding 5.9%. In the U.S., the Nasdaq Composite shed 2.6%, while the S&P 500 fell 1.6%, despite stronger-than-expected jobs data showing 172,000 new nonfarm payrolls in May.

Broadcom's Earnings Spark Rotation

The catalyst for the global tech rout was Broadcom's downbeat earnings report, which raised concerns that the AI boom may be losing momentum. The company's results prompted a broad rotation out of artificial intelligence-linked stocks and into more defensive sectors such as utilities and consumer staples. This shift was particularly pronounced in South Korea, where the chip sector accounts for a significant portion of market capitalization and export revenue.

Analysts noted that the sell-off reflects growing unease about valuations in the AI space, which have soared over the past year. "The market is questioning whether the AI narrative can sustain its current pricing," said Timothy Moe, Goldman Sachs' chief APAC equity strategist. However, Moe remains bullish on memory stocks, calling them "the stars of the show" and suggesting that the recent pullback in defense stocks presents an attractive entry point for investors.

Hyperscaler Capex Remains Robust

Despite the market jitters, some investors see the sell-off as a temporary correction rather than the end of the AI cycle. Jean-Louis Nakamura, head of conviction equities at Vontobel, told CNBC that there is "no risk" hyperscalers will revise their capital expenditure plans lower in the next 12 to 18 months. He expects chip manufacturers and memory producers to continue benefiting from strong pricing and earnings trends.

Nakamura also revealed that Vontobel has selectively increased its positions in certain Chinese internet platforms, which he believes have been "over-punished" and are well-positioned to monetize AI using vast pools of personal data.

Labor Minister Calls for Profit Sharing

Amid the market turmoil, South Korea's labor minister Kim Young-hoon added a new dimension to the AI debate by calling on major tech firms to share their windfall profits with suppliers and workers. In an interview with Reuters, Kim warned that the unprecedented gains from the AI boom risked widening inequality and urged companies like Samsung to engage in social dialogue on profit distribution.

Kim, a former labor activist appointed by President Lee Jae Myung, helped broker a last-minute pay deal between Samsung and its union that averted a major strike. He now proposes that companies outperforming profit targets should share excess gains with subcontractors and employees. "We should set new rules for distribution through social dialogue," Kim said, highlighting the need to narrow the gap between large conglomerates and smaller suppliers.

Market Outlook

While the sell-off has rattled markets, some strategists argue that the broader AI trend remains intact. Roger Lee, head of equity strategy at Cavendish, suggests that mid-cap stocks could offer value if oil prices continue to fall, easing inflation and interest rate expectations. He notes that equity markets outside U.S. technology are heavily influenced by oil prices, which have been declining recently.

The coming weeks will be critical in determining whether the AI boom is truly cooling or merely experiencing a healthy correction. For now, the South Korean chip rout serves as a stark reminder of the volatility inherent in high-growth sectors.

Key Takeaways

1. South Korea's Kospi fell 5.5% on Friday, led by a 9.9% drop in SK Hynix and a 6.4% decline in Samsung Electronics, as a global tech sell-off intensified after Broadcom's weak earnings.
2. The sell-off reflects a rotation from AI-linked stocks into defensive sectors, driven by concerns over valuations and the sustainability of the AI boom.
3. Despite the downturn, some analysts and investors remain bullish on memory chips and hyperscaler capex, viewing the pullback as a buying opportunity.
4. South Korea's labor minister called for tech giants to share excess profits with suppliers and workers, adding a regulatory layer to the AI narrative.

Sources: CNBC - Global Tech Sell-Off, CNBC - 3 Ways the Pros Are Trading, CNBC - South Korea Labor Minister