(Sept 11): Fund managers wading back into South Korean memory makers’ stocks got a fresh gut check after DeepSeek’s latest artificial intelligence model raised doubts on the strength of demand.
Samsung Electronics Co and SK Hynix Inc shares dipped more than 3% each Friday, paring their nascent rebound from July’s steep selloff. DeepSeek’s comment that it has reduced the amount of high-bandwidth memory required in its AI models added to concerns on tech amid fears of US interest rate hikes.
Sentiment toward the chip duo had been improving on signs of continued Big Tech spending, along with cheap stock valuations, bumper earnings and generous shareholder returns. While most investors see the latest DeepSeek development as a short-term setback, the latest declines show the rebound won’t be linear.
“DeepSeek’s new model could stoke concerns about a slowdown in semiconductor demand in the near term,” said Ha SeokKeun, chief investment officer at Eugene Asset Management. Still, new models from the likes of Meta Platforms Inc and OpenAI “will have a greater impact on the industry’s fundamentals by boosting actual AI usage and semiconductor demand.”
Local retail traders drove a feverish rally in Samsung and SK Hynix earlier this year before abruptly reversing course on a severe bout of AI skepticism. They’ve been rapidly exiting leveraged exchange-traded funds tied to the chipmakers, and have sold more than US$10 billion worth of the two stocks this month alone.
Daily swings being less dictated by the whims of retail investors has tempted the return of some foreign funds, which have been large sellers year to date.
“We are definitely more positive on Korean memory chipmakers than anything else in semiconductors,” said Isaac Thong, senior investment director and manager of the Aberdeen Asian Income Fund in Singapore. Based on a blend of price-to-book and price-to-earnings valuations, “these stocks look cheap, especially compared to global peers,” he added.
Samsung trades at 2.7 times current book value and SK Hynix at five times, compared with 11 times for the Philadelphia Semiconductor Index. The Korean memory stocks are both trading at around 4 times forward estimated earnings, versus 19 times for the gauge of global chipmakers.
The two Korean memory stocks remain more than 25% below their all-time highs, however, with investors still spooked by wild swings on daily news and position adjustments. While volatility has subsided, it remains near peak levels seen during Covid and the 2008 financial crisis.
“These names are going to be volatile. For most investors, there are ways to get the same returns with a lot less volatility,” said Matthew Tuttle, chief executive officer at Tuttle Capital Management.
Despite the decrease in leverage and measures implemented by regulators in an effort to restore calm, daily moves of 5% or more are still common for Samsung and SK Hynix. Given the strong fundamentals, foreign investors may return when there is a significant decrease in volatility, according to Jung In Yun, chief executive officer at Fibonacci Asset Management Global.
The DeepSeek news may drive “some sentiment-driven pressure rather than assume a lasting sector selloff,” he added. Longer term, “cheaper AI could drive greater usage, offsetting efficiency gains.”
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