SINGAPORE – A sell-off in AI supplier shares on Oct 13 is the strongest sign to date that the mood on the trade of the decade is shifting, with worries that rising interest rates could scupper a spending spree bigger than America’s historic railroad boom.
Nearly four years since the launch of OpenAI’s ChatGPT, cash has streamed into semiconductor companies, data centre owners, cable companies and anyone reaping revenues from an unprecedented race to build computing infrastructure.
Cracks in those bets began in June and are now widening across markets, with a data centre IPO collapsing last week in Australia and credit investors becoming picky on AI debt.
In Asia, selling of South Korean chipmaker shares extended into a fifth straight day on Oct 13, with the KOSPI index falling more than 6%, while in Tokyo, memory-maker Kioxia, down 13%, led AI-related losses.
In the US, the chip stock selling continued into a fourth day on Oct 13, with the Philadelphia semiconductor index down 1.7% and Micron Technology off 4%. The SOX remains up 68% for the year, and Micron stock has tripled.
The falls are the heaviest since the same sort of stocks collapsed at the end of July. The KOSPI is on its longest losing streak for more than two years, down a quarter from July highs, while Shanghai’s tech-focused STAR Market has lost more than a third from July peaks.
“The most important development has been not just bond yields going up, but the volatility for bonds… and that’s starting to work its way out through asset pricing across the board,” said Damien Boey, portfolio strategist at Wilson Asset Management in Sydney.
“It’s a very uncomfortable situation on many fronts… Maybe AI capex just comes off the boil a little bit, and maybe a few players are casualties in that.”
The SOX dropped 2.7% on Oct 12 and even heavier selling drove Seoul-listed chipmakers Samsung Electronics and SK Hynix down by 10% and 8%, respectively.
On Oct 12, the research arm of BlackRock, the world’s biggest asset manager, downgraded its US stocks outlook to neutral, citing “potential volatility around the AI build-out” and turned bullish on short-term Treasuries.
“The consequences of an AI correction could be global,” the International Monetary Fund warned on Oct 13 in its latest financial stability report.
The International Monetary Fund called out AI’s contribution to growth but said there was growing evidence that capability investments and economic gains may not be as big as expected.
Cost of capital
Caution is also coursing through primary markets.
Last week, Firmus, a data centre operator backed by Nvidia, shelved a US$5 billion (S$6.4 billion) initial public offering in Australia as investor interest shrivelled, underscoring how suddenly risks are becoming the chief focus in allocating capital to the sector.
Oct 13’s dollar and dim sum bond sale by Tencent Holdings in Hong Kong was the latest deal in debt markets’ sights, with guidance for 10-year dollar notes about 1.15 percentage points on top of Treasury yields, which sit at 5.2%.
Japan’s tech investor SoftBank in September sold the biggest high-yield debt pile ever and promised to pay as much as 9.75% on US$4.5 billion it raised at a 7½-year tenor.
The mood shift was front of mind at a slew of top financial conferences in Singapore, most recently on Oct 12, when Broadcom’s chief executive said capital was the biggest constraint on growth.
To be sure, few are calling time on the AI trade altogether, and on Oct 12, Meta shares jumped 3.4% on the release of a new AI model, but many see semiconductors as a warning sign.
Marc Velan, head of investments at Lucerne Asset Management in Singapore, believes the “brutal session” in South Korea says more about positioning and the cost of capital than about any fundamental deterioration in AI demand.
“I suspect we’re entering the next phase of the AI cycle, where markets increasingly focus on monetisation and returns on invested capital – I wouldn’t call this the end of the AI trade,” Velan said. “But Korea could be an early warning of a broader shakeout.” Reuters
