Korea’s AI Crackdown May Pave the Way for a Healthy Market Correction, Offering Opportunities for India, Says Rahul Chadha.
The recent regulatory actions taken by South Korean authorities have stirred uncertainty within the artificial intelligence (AI) semiconductor sector, leading investors to reevaluate valuations following a protracted period of gains. Market experts observe that the recent price corrections in South Korean chipmakers, particularly Samsung and SK Hynix, could serve as a healthy adjustment rather than a terminal decline in the AI-driven rally. Rahul Chadha of Shikhara Investment notes that the semiconductor stocks had become excessively overvalued during the AI surge, prompting his funds to adopt a more cautious stance by underweighting the sector by approximately 5-6%. The focus is anticipated to shift to developments from major players within the AI landscape, particularly regarding their capital expenditure plans related to AI technologies.
The demand outlook for AI semiconductor products remains a critical factor, with Chadha indicating that any sustained pullback might further inhibit growth in the sector. While a 10% decline in certain Korean semiconductor stocks has been observed, he projects that a further 5-7% drop could be possible if demand begins to show signs of weakening. Despite these concerns, earnings revisions have remained robust due to ongoing chip shortages, with supply not expected to normalize until around 2028. Consequently, investors are advised to maintain vigilance concerning market dynamics and demand trends that could impact the semiconductor and broader AI landscape.
Beyond the semiconductor market, South Korea’s evolving fiscal policies, particularly discussions around taxing unrealized gains, warrant close monitoring. The country’s bid for developed market status by MSCI has also been called into question due to unresolved currency convertibility issues. Chadha emphasizes that this upgrade was never a sure scenario, and its absence may impact investor sentiment. Conversely, the Indian market appears to be on more stable footing, underpinned by easing geopolitical tensions, declining crude oil prices, and a strategy by the Reserve Bank of India to bolster reserves. Nevertheless, medium-term challenges related to job creation and urban demand remain pressing concerns that could impede growth.
Additionally, foreign investor behavior indicates a strategic rotation rather than a complete exit from Indian equity markets. Chadha comments on a noticeable shift whereby foreign institutional investors are reallocating funds away from traditional large-cap stocks towards emerging growth avenues like manufacturing exports and consumer internet companies. This rebalancing reflects an adaptive approach to evolving earnings momentum, with regions such as Taiwan and South Korea maintaining attractiveness if they can continue to deliver strong earnings growth. Investors are encouraged to remain observant of these shifts in capital flows as they could have significant implications for market dynamics and overall investment strategies.
Source: The Economic Times
(Expert Note: This report was prepared by the Wealthova team.)