Is The AI Investing Boom Sustainable?
The sustainability of the AI (Artificial Intelligence) spending boom has come under scrutiny due to China’s progress in advanced chip making, which has resulted in a sell-off of semiconductor stocks and shares throughout the world. Although the MSCI (Morgan Stanley Capital International) World Semiconductor Index is still up 28% since the 1st January this year, this month, it has fallen by 16% recording its worst performance since 2022. Data also shows the Philadelphia Semiconductor Index falling for the fourth session in a row, and the tech heavy US Nasdaq-100 fell 1.80% having already fallen by 10.00%.
In South Korea, the Kospi fell by 11.00% with chip giants such as SK Hynix Inc (fallen by a total of 47% from their record high last month) and Samsung Electronics Co both falling by more than 14.00%. Indeed, SK Hynix Inc has suffered a $600 billion collapse in just over a month, which analysts say is due to an increase in leveraged-induced volatility and overcrowding, and has gone from one of the world’s most fashionable and hottest trades to portfolio managers now questioning whether to hold or sell. Today, South Korea led the Asian sell-off in semi-conductor shares with selling carrying on through Europe and onto the United States, with key chip companies taking the brunt of the sell-off.
Analysts suggest that one of the main reasons for the sell-off in superconductor shares are reports that Chinese companies have begun mass producing machinery that is critical to the manufacture of advanced microchips, critical to the performance of AI. Indeed, experts in the semiconductor industry report that China-based Shanghai Yuliangsheng has begun producing lithography machines. These machines use high-powered lasers to imprint designs onto silicon wafers, which are then used to manufacture chips. Analysts advise that later this year Shanghai Yuliangsheng is expected to start delivering lithography machines to leading Chinese chipmakers.
Experts acknowledge that up to now, this technology was dominated by leading western chip giants and suggest the progress that China has made in the chipmaking arena has placed the semiconductor market in a bit of a panic, as the Chinese progress could threaten the competitive position of global chip equipment and chipmaking leaders. Adding to market concerns was the Shanghai stock market debut on Monday 27th July of the Chinese memory-chip maker CXMT, as analysts suggest this company may well intensify global competition in the memory industry. One industry expert suggested that CXMT will be one of the big industry’s weights and this was borne out by the company’s valuation soaring by 466% on market debut.
A report suggesting that a Chinese state-backed company had begun to mass produce immersion deep ultra violet lithography machines for chipmaking has also spooked the markets, with investors worrying if the payoff would be worth the billions being invested in AI development. Experts advise that investors are also worrying about the increase in “circular deals”, as there are interconnections between AI start-ups and technology manufacturers, where losses can be magnified if AI do not match up to heightened market expectations. A circular deal in this instance is where a primary supplier such as a chipmaker or cloud provider invests capital or provides financial backing to an AI model developer, who then immediately routes that money back to the investor by purchasing their hardware, cloud or infrastructure services.
A number of market commentators within this arena suggest that short-term semiconductor stocks face high volatility, sharp global selloffs and technical pressure, driven by recent repricing, despite underlying AI demand remaining strong. Key items include near-term downside momentum, heavy data-centre spending and high valuations, resulting in global chip stocks recently shedding over $1 trillion in a broad market correction as investors deleverage and re-evaluate risk.
