The U.S. midterm elections have introduced new variables into the AI investment frenzy. Concerns over stricter regulations for data center permits have raised fears of potential disruptions in big tech's capital expenditures, leading to a significant outflow of funds from previously overheated AI-related stocks. Amid policy uncertainties and the liquidation of investment positions, the domestic stock market has sharply declined, prompting investors to assess the impact of the 'blue tsunami' on the growth trajectory of the AI industry and semiconductor demand.
According to financial investment industry sources, the first variable is the regulation of AI data center (AIDC) permits. The Democratic Party's unexpected gains have changed the policymakers in key data center locations, drawing market attention. Lee Jae-won, a researcher at Yuanta Securities, noted, "The shift in congressional power has extended to the policymakers in major data center locations."
Texas, in particular, is a critical hub, accounting for about 30% of the new data center capacity expected to be added in the U.S. by 2028. The outgoing Republican governor has halted reviews for power grid access and environmental permits, while the newly elected Democratic governor has stated that a moratorium will remain in place until laws are established to protect household electricity rates and water resources. Concerns are also rising in Georgia and Ohio, where changes in governorship could alter the regulatory environment for major data center hubs.
However, a change in governors does not necessarily lead to a halt in data center construction. The researcher added, "While the broader Democratic victory may justify a reassessment of investment execution risks, it does not warrant a sell-off based on the assumption of total cancellation of AI investments." The impact varies between projects with existing permits and those requiring new approvals, and legislative negotiations are necessary for long-term regulations. Notably, many data centers scheduled to begin construction next year are already underway.
The second variable is the reduction of positions by hedge funds that led the AI rally. As investment funds concentrated in AI-related stocks have begun to withdraw, selling pressure in the market has increased. The Wall Street Journal reported that a client report from Morgan Stanley indicated that the scale of active position reductions by stock-picking hedge funds last month reached its highest level in a decade. These funds have reduced their exposure to the stock market by about 9% since June.
A report from Goldman Sachs revealed that hedge funds focused on technology, media, and telecommunications (TMT) sectors recorded losses exceeding 4% in just one day on November 5. These funds had achieved returns of up to 24% year-to-date before the recent sell-off in AI-related stocks, but they have since given back nearly all of those gains.
Seo Sang-young, a managing director at Mirae Asset Securities, stated, "The hedge funds' concentrated exposure to AI stocks, losses, and pressure to reduce leverage, compounded by option selling, have amplified the declines. Ultimately, the key for the market moving forward will be whether aggressive selling by foreign investors subsides, how much actual AI investment execution is delayed, and whether the excessive concerns are alleviated."
Market experts interpret the current shock not as the end of long-term AI demand but as a shift in the cycle and a process of adjusting investment speeds.
While concerns over stricter data center regulations and potential construction halts at the local government level have surfaced, the long-term trend of increased capital expenditures by big tech remains intact. This suggests that the impact may be limited to delays and increased costs rather than a complete cessation of projects.
Particularly, with the recent drop in the KOSPI, domestic semiconductor companies' 12-month forward price-to-book ratios have approached or fallen below 1, indicating a level of valuation support.
Hwang San-hae, a researcher at LS Securities, commented, "In this changing market environment, while semiconductor investments face pressures from speed and margin corrections, a shift in the direction of the AI cycle does not imply the end of long-term demand. If further declines bring domestic semiconductor forward PBR close to 1, it historically represents an attractive entry point, making a long-term phased buying strategy valid. Additionally, if the cost burdens triggered by the AI investment frenzy are alleviated, it could serve as a catalyst for market recovery."
However, the short-term supply concerns and market volatility stemming from the blue tsunami are expected to take some time to stabilize.
The structural changes in Congress, with both chambers controlled by the Democrats, combined with foreign investors building downward hedge positions, algorithmic trading-induced sell-offs, and excessive leverage liquidation, have maximized risk-averse sentiment. For the time being, it is essential to monitor credit risk management for distressed assets and high-cost projects, as well as key economic indicators such as U.S. employment data.
Some analysts suggest that adjusting investment speeds could serve as a catalyst for market recovery. If the chip inflation and infrastructure cost burdens triggered by the AI investment frenzy are alleviated, it could lead to cost reductions for companies and lower concerns about further tightening from monetary authorities. Han Ji-young, a researcher at Kiwoom Securities, stated, "Adjusting the speed of AI investments could improve free cash flow for hyperscaler companies, brightening the outlook."
* This article has been translated by AI.
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