Key Takeaways
- The KOSPI Technology Index has declined by 7.5% in the third quarter of 2024, reversing a 25% gain from the first half of the year.
- Shares of South Korean memory chip giant $SKHYN have fallen 9.2% over the past month, reflecting investor concerns over slowing global demand.
- This downturn signals a potential cooling in the broader global artificial intelligence sector, prompting investors to re-evaluate valuations and growth prospects.
South Korean AI Sector Faces Headwinds Amid Global Slowdown
South Korean artificial intelligence-related stocks, once global outperformers, have seen a significant reversal, with the KOSPI Technology Index declining by approximately 7.5% in the third quarter of 2024. This marks a stark contrast to their robust 25% surge in the first half of the year, signaling a broader deceleration in global AI investment. The shift underscores a growing skepticism among investors regarding the sustainability of the sector's previous growth trajectory.
This downturn has prompted a widespread sell-off in key components of the South Korean tech ecosystem. Shares of memory chip giant $SKHYN have fallen 9.2% over the last month, while AI software firm $NAVER shed 6.8% in the same period, as investors re-evaluate the sector's elevated valuations. Average daily trading volumes for AI-related exchange-traded funds (ETFs) in South Korea also decreased by 15% in September compared to August, indicating a notable cooling in investor sentiment and participation.
Market Impact
The recent performance of South Korean AI stocks represents a significant recalibration for a market that had ridden the initial wave of enthusiasm for generative AI. The KOSPI Technology Index's current trajectory marks its sharpest quarterly decline since the fourth quarter of 2022, when global tech stocks faced a broader downturn. This reversal has erased roughly $35 billion from the collective market capitalization of South Korea's top ten AI-related companies since late July.
Beyond the headline indices, individual companies have also experienced substantial corrections. Hanmi Semiconductor Co. ($042700), a key supplier for high-bandwidth memory crucial to AI chips, has seen its stock price drop 12.5% in October alone, after peaking in August. Similarly, Kakao Corp. ($035720), a major player in AI language models and services, recorded an 8.1% decline over the past four weeks, falling to levels not seen since early June.
The cooling in South Korean AI equities has also exerted pressure on the broader KOSPI benchmark, which has retreated 4.1% since the start of the third quarter, underperforming regional peers like Japan's Nikkei 225. This spillover effect highlights South Korea's significant exposure to the global technology supply chain and its vulnerability to shifts in global demand for advanced semiconductors and AI infrastructure. Furthermore, the Korean Won ($KRW/USD) has shown signs of weakness, depreciating by 1.5% against the US Dollar in October, partly due to concerns over weakening tech exports.
What Analysts Are Saying
Institutional analysts are offering a mixed but increasingly cautious outlook on South Korean AI stocks. Goldman Sachs analysts, in a recent note dated October 15, revised their sector outlook for South Korean AI hardware manufacturers to "neutral" from "overweight." They cited slowing enterprise IT spending and potential inventory corrections in the memory sector as primary drivers for their more conservative stance, suggesting that the peak of the AI hardware upgrade cycle might be further out than initially anticipated.
Conversely, Morgan Stanley maintains an "overweight" rating on select South Korean AI software providers, arguing that the current pullback presents a buying opportunity for investors focused on the long-term structural growth of AI. Their report, published on October 12, projects a 15% compound annual growth rate (CAGR) for global AI software revenues through 2028, emphasizing that the fundamental demand for AI solutions across industries remains robust despite short-term fluctuations.
Mirae Asset Securities strategist Kim Min-soo offered a nuanced perspective on October 10, noting that while the immediate outlook for AI hardware is challenging due to global demand fluctuations, companies diversifying into custom AI chip solutions or advanced packaging could outperform. Kim specifically pointed to firms innovating in specialized AI accelerators or advanced packaging technologies as potential beneficiaries, albeit with higher associated volatility, as they cater to niche, high-growth segments of the AI market.
What to Watch
Investors should closely monitor upcoming earnings reports from key South Korean tech giants for insights into future guidance and demand trends. $SKHYN’s third-quarter earnings, expected on October 26, will be particularly crucial, as management commentary on memory chip inventory levels and capital expenditure plans will heavily influence market sentiment for the semiconductor sector. Any significant revisions to full-year revenue forecasts could trigger further market movements.
Global macroeconomic data, especially from the United States and China, will also be pivotal. The next Federal Open Market Committee (FOMC) meeting on November 1-2 will provide critical clues on the trajectory of US interest rates, which directly impact technology valuations. Additionally, monthly semiconductor sales data from the Semiconductor Industry Association (SIA) will offer a broader gauge of global chip demand, with any sustained decline signaling deeper sector challenges.
Technically, the KOSPI Technology Index faces immediate support at the 2,200-point level, a breach of which could signal a deeper correction towards 2,050 points. Resistance is currently observed around 2,450 points, requiring a strong catalyst to overcome. Investors should also watch for any new announcements regarding South Korean government initiatives aimed at bolstering the domestic AI industry, such as increased research and development funding or tax incentives, which could provide a localized boost.
However, several risk factors could reverse any nascent recovery. Intensified geopolitical tensions, particularly between the U.S. and China over technology dominance, could disrupt supply chains and limit market access for South Korean firms. A more pronounced global economic slowdown than currently anticipated, or renewed inflationary pressures driving up energy costs, would further compress corporate margins and consumer spending on tech, posing significant headwinds to the AI sector's growth trajectory.
