Caution is growing among global asset managers around Samsung Electronics and SK hynix, which have led the artificial intelligence (AI) chip rally. As the market capitalization of Asia's leading chipmakers has surged, some global investors are taking profits, while others are starting to see the sheer concentration itself as a warning sign.
On the 13th, according to the Financial Times (FT), global asset managers including Fidelity International and BlackRock have recently reduced their exposure to Samsung Electronics, SK hynix and Taiwan's TSMC or taken a cautious stance.
The three companies have benefited from U.S. big tech's increased AI investment, with their market capitalization roughly doubling over the past six months. The current market capitalization of Samsung Electronics, SK hynix and TSMC has swelled to around $1 trillion each, and the three together now account for about 29% of the MSCI emerging markets (EM) index. That is roughly three times India's entire market weight, and the market value of SK hynix alone exceeds the combined size of listed companies in Brazil and South Africa, FT reported.
Global managers see this level of index concentration as heightening investment risk.
Caroline Shaw, a multi-asset portfolio manager at Fidelity International, said, "Index concentration and the expansion of leveraged bets on Korean chipmakers were like markers in the sand," and added, "Through that we could gauge whether the weighting was excessive."
BlackRock, the world's largest asset manager, has also taken some profits.
Wei Li, global chief investment strategist at the BlackRock Investment Institute, said, "We are happy to take profits. Given the increased volatility of some large chip names, we are reducing our emerging-market equity exposure," adding, "With expectations already priced in, it is time to wait and see."
Foreign fund flows also show signs of change. FT reported that since the start of the year, foreign investors have been net sellers of about $100 billion (about 150.78 trillion won) in Korean stocks. The fact that some active funds have approached the customary 10% cap for a single stock is also cited as a reason for trimming positions.
Still, optimism about the chip cycle remains.
Sunil Tirumalai, head of emerging-market equity strategy at UBS, said, "(Asian chipmakers) have effectively become oligopolies," adding, "Once tech companies reach scale, they keep getting bigger. From an investor's perspective, monopolies are always investments that deliver massive profits."
However, future supply expansion is flagged as a variable. Analysts say that Intel's foundry expansion backed by the U.S. government, along with the listing and capacity expansion plans of Chinese memory makers Changxin Memory Technologies (CXMT) and Yangtze Memory Technologies (YMTC), could intensify competition ahead.
FT also noted that emerging-market investment strategy itself is changing. In the past, emerging markets offered diversification benefits based on an industrial structure different from that of the U.S. market, but now a setup has formed in which AI chip companies move both U.S. and emerging-market indexes at the same time.
James Johnstone, co-head of emerging and frontier markets at Redwheel, said, "Historically, emerging markets were seen as a place to diversify risk and returns, but chip manufacturers now account for a large share of both U.S. and emerging-market indexes."
He warned, "When you see this kind of extreme concentration, it often signals the peak of the cycle," adding, "Cycles usually end in one of two ways: either demand cracks and prices collapse, or supply floods in and prices collapse."