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Thought of the day

Shares of Samsung Electronics and SK Hynix fell 8.8% and 11.5%, respectively, in Seoul on Thursday, dragging South Korea’s equity benchmark Kospi lower by 6.4%. The latest drop added to recent volatility that has pushed the index more than 25% below its all-time high recorded in June.

Domestic regulatory concerns contributed to the declines, with the head of the Financial Services Commission saying the country will soon announce measures to curb the risks of single-stock leveraged exchange-traded funds (ETFs). Questions over the durability of the AI rally and uncertainty in the Middle East have also weighed on the broader semiconductor industry. The Philadelphia Semiconductor Index has fallen about 15% during the same period.

But we view the recent volatility in the context of the sharp second-quarter rally and idiosyncratic developments in South Korea. Overall, we remain constructive on semiconductors given their solid fundamentals.

Highly leveraged retail trades have fueled elevated volatility in South Korea. Launched in May, more than a dozen single-stock leveraged ETFs tied to Samsung Electronics and SK Hynix quickly amassed a cumulative trading value of KRW 212tr (approximately USD 140bn) in their first month, boosted by highly leveraged retail participation. The Kospi’s 9% single-day drop earlier this week triggered margin calls on over 1.2 million retail accounts, resulting in over 300,000 accounts being forcibly liquidated and wiping out billions of dollars in principal. President Lee Jae Myung ordered regulatory bodies to act swiftly to ensure market stability and protect investors. Details remain to be seen, but ultimately, some regulatory oversight may prove healthy for the market. A partial unwind should not necessarily be feared, in our view, given earnings remain strong.

ASML and TSMC reported robust earnings amid strong AI demand. In addition to Samsung’s forecast of a 19-fold increase in second-quarter profit, both ASML and TSMC this week reported robust results for the three-month period. TSMC’s net profit jumped 77% year over year to a record, raising revenue guidance for the current quarter as well as its capex target for 2026. ASML’s revenue, gross margin, earnings, and free cash flow all came well above consensus estimates, and it raised its 2026 revenue guidance to 10% above the consensus forecast. The Dutch semicap maker also projected higher sales for both 2027 and 2028. Without taking any single-name view, we think these results demonstrate both the current intensity and duration of the semiconductor capacity upcycle. While we think many of the memory segment’s catalysts have transpired in recent months, we still see strong growth opportunities in other segments within semis.

Robust AI spending should keep semiconductors supported in the near term, although risks are emerging. Following several years of rapid capex expansion, big tech companies’ spending requirements will soon overtake their operating cash flows. With investor pressure for greater capital discipline likely to increase, we acknowledge the rising risk of capex growing at a slower-than-expected pace. We also do not expect another round of capex guidance increases when US hyperscalers report earnings in the coming weeks. Still, we believe capex cuts in the near term are equally unlikely, as GPU rental prices have reaccelerated recently, and constraints remain in certain parts of the semiconductor supply chain. We expect overall AI spending to rise to near USD 1tr in 2027, although visibility beyond that is limited at this stage.

So, we think recent volatility underscores the importance of a selective approach to semiconductors, with semiconductor equipment, foundries, and compute our top three areas of focus. Investors should also ensure they have a balanced and diversified exposure to the AI theme.