Asian stock markets faced a widespread and brutal selloff, primarily attributed to anxieties surrounding Artificial Intelligence (AI) valuations, increasing competition, and skepticism about the financial returns on the substantial investments made in AI infrastructure. South Korea's Kospi index, for instance, plunged by 10.8% on one day and dropped significantly again the following day, reaching its lowest level since early April. Similarly, Tokyo's Nikkei 225 fell by 4%, while Taiwan's index was also down more than 4%.
The downturn severely impacted major chip manufacturers. South Korean giants SK Hynix and Samsung saw their shares plummet by 14.7% and over 13% respectively, with SK Hynix shares falling another 9% even after reporting a sixfold increase in quarterly operating profit that still missed high expectations. Japanese semiconductor companies also suffered significant losses, with Kioxia shedding over 18%, Advantest diving 10%, and Tokyo Electron dropping 11%. Chip giant TSMC in Taiwan also took a hit.
The market's shift reflects a change in investors' willingness to capitalize on AI promises at almost any price. Analysts noted that the "AI trade" had operated like a "flywheel" where rising equity values fueled spending, validating higher earnings expectations and pushing valuations even further. However, this dynamic is now reversing, causing investors to pull back. Concerns were further fueled by a report that China's Shanghai Yuliangsheng started mass production of a chipmaker technology previously dominated by a Dutch firm, intensifying fears of rising competition.
Ahead of crucial earnings reports from major tech firms like Microsoft, Meta, Apple, Amazon, SK Hynix, Samsung, and Kioxia, as well as a US Federal Reserve policy decision, investors are taking risk off the table. Experts like Stephen Innes at SPI Asset Management indicated that the immediate fundamentals of semiconductors haven't collapsed, but rather the market's perception has changed. There are also worries among some investors about a "circular financing" trend where a few companies invest into each other, making organic demand unclear.
