KOSPI Plunges on Data Center Concerns After Midterm Elections as Debate Over AI Chip Demand Widens

Foreign Selling Deepens KOSPI Losses The KOSPI fell about 3.75% to around 5,448 intraday, while the KOSDAQ slipped about 3.8% to the 687 level. Losses widened in the afternoon, with the KOSPI down roughly 4.3% at around 5,439 and the KOSDAQ down 4.05% at around 685. Intraday selling pressure was strong enough to trigger a KOSPI sell-sidecar. Foreign investors were net sellers in both cash equities and futures on the Korea Exchange. Their selling in cash equities exceeded KRW 2 trillion intraday and rose to around KRW 2.3 trillion in the afternoon, while net selling in futures continued at the KRW 300 billion level. Foreign investors also sold KOSDAQ shares. The won-dollar exchange rate traded around 1,343 won, up about 2 won from the previous day. The scale of foreign selling relative to domestic trading value also amplified the market decline. With trading value below KRW 15 trillion, selling of around KRW 2 trillion left insufficient demand to absorb the supply. As foreign funds sold large-cap domestic semiconductor stocks in step with weakness in U.S. semiconductor shares, downward pressure spread across the broader market. KOSPI and KOSDAQ Intraday and Afternoon Losses — Compared intraday and afternoon losses in the KOSPI and KOSDAQ. Losses widened for both indices in the afternoon, with the KOSPI posting the largest decline at 4.3%. Semiconductors and Power Infrastructure Weaken on AI Data Center Concerns Stocks linked to semiconductors, AI hardware and power equipment weakened as concerns grew that data center construction could be delayed or regulated following the U.S. midterm elections. Major U.S. indices, including the S&P 500 and Nasdaq, rose, but the Philadelphia Semiconductor Index fell. Google gained more than 3%, while Microsoft and Amazon rose more than 6%; Micron Technology, by contrast, fell more than 7%. The negative market thesis is that delays to data center investment would reduce capital spending by big tech companies and weaken semiconductor demand. A counterargument is that lower data center investment could increase utilization and profitability at existing facilities and improve big tech companies’ cash flows. AI hardware stocks came under pressure as concerns surfaced simultaneously over financing for companies building data centers and potential political constraints on future construction. Some countered that demand already secured and construction schedules would not disappear in the short term. Among data center development plans concentrated in Texas, operational facilities, projects under construction and contracted capacity would be difficult to reverse; including projects at an early stage, a substantial amount of capacity is already in progress. Persistent shortages of power, chips and water were also cited as constraints, making it difficult to expand data centers immediately even when permits are granted. Oil Falls, but Rate-Cut Expectations Remain Dependent on Economic Data Expectations that the United States would seek to end the war in Iran grew after the Democrats’ sweeping victory, sending international oil prices lower. WTI fell to around $87 a barrel, while the U.S. 10-year Treasury yield moved below 4.9%. The decline in oil prices was seen as easing inflationary pressure and reducing concerns about rate hikes. However, it is difficult to conclude that the rate path will immediately turn more accommodative. U.S. services and manufacturing indicators showed expansion, employment remained relatively resilient and some inflation-related indicators came in high, prompting the probability of a December rate hike to rebound. Market expectations shifted rapidly, with the probability of a hike rising again after economic data were released, following a decline immediately after the election results. The U.S. October employment report is due this week, followed by the October Consumer Price Index next week. Nvidia’s earnings, the U.S. October Personal Consumption Expenditures price index and the Bank of Korea Monetary Policy Board meeting were also highlighted as key upcoming events. The Federal Reserve’s December rate decision remains a major variable, and Anthropic is scheduled to begin its IPO roadshow next week. Hopes for an End to the War Influence Oil Prices and U.S. Investor Sentiment U.S. Vice President JD Vance cited the war in Iran as a reason for the election defeat, and President Donald Trump was also reported to have acknowledged the war’s costs. Hakeem Jeffries, the Democrat considered the leading candidate for the next House speaker, stressed the need to end the war, saying it had pushed up fuel and fertilizer prices and fed through to food prices. The Democrats’ argument that ending the war was necessary to ease the cost of living supported expectations of lower oil prices. The war and the cost of living were cited as factors in the election result, tied to the expenses U.S. voters feel in their daily lives. The explanation was that rising fuel and grocery bills, alongside higher mortgage interest costs, had intensified pressure on household budgets. If the U.S. administration seeks an exit rather than an escalation after the election, analysts said uncertainty stemming from the Middle East and oil-price volatility could ease. The U.S. market also responded to President Trump’s statement that he would accept the election result and work with the Democrats. One interpretation was that investor sentiment in U.S. equities recovered as concerns over a challenge to the result or continued political conflict diminished. Whether an end to the war and price stability translate into actual policy will depend on subsequent administration actions and negotiations in Congress. Data Center Rules Balance Local Costs Against Industrial Competitiveness Concerns that data center regulation could tighten in areas where Democrats won emerged as a factor behind weakness in semiconductor stocks. Particular attention focused on victories by Democratic candidates in Texas and Georgia, where a significant share of the data centers expected to be built in the United States by 2028 are planned. The Texas governor-elect’s pledges included reviewing tax incentives and subsidies for data centers, protecting water supplies and electricity for residential use, and expanding local communities’ decision-making authority. Some interpreted these pledges as aimed more at managing data centers’ use of power and water and their impact on local communities than at halting the AI industry. Residents are concerned that data centers’ heavy use of electricity and water could raise utility and water costs, while leaving communities to bear the burden on transmission networks and the environment. Big tech companies are responding to political demands with proposals to procure power directly and cover the related costs. Changing state or federal laws and applying them through actual permitting procedures will take time; presidential vetoes and negotiations in Congress are also variables. Facilities already operating or under construction, as well as projects with completed contracts, would be difficult to halt in the short term. Political scrutiny could make project development more challenging, but the view that data center construction will stop immediately was described as excessive. China Moves to Support Equities With Buybacks and Liquidity As weakness has persisted recently in Chinese equities, authorities have rolled out a series of support measures. These include encouraging companies to buy back their own shares and providing financing through low-interest loans to companies with insufficient funds of their own. Measures are also being pursued to help institutional investors convert long-term assets into more liquid short-term assets, increasing their capacity to buy shares. Other proposals include curbing new IPOs, encouraging insurers to invest a set share of funds from new products in equities, and restricting share sales by company employees and executives. Chinese equities were reported to have fallen about 10% over the past month, extending a run of consecutive declines. Market pressures have mounted, with some recently listed stocks also correcting sharply from their highs. It is uncertain whether these measures will lift share prices immediately, but the signal that authorities are responding rather than allowing the market to fall unchecked could affect investor confidence, analysts said. Similar concerns were raised in South Korea about the need for demand to absorb foreign selling and efforts to stabilize the market. Cosmetics Hold Up as Clean Energy and Consumer Stocks See Rotation In the domestic market, cosmetics stocks performed relatively well as semiconductor shares plunged. Gains in U.S. consumer goods, cosmetics and retail stocks—driven by expectations that easing inflationary pressure after the U.S. midterm elections would support consumption—carried over to South Korea. Rising K-beauty exports and sales events such as Amazon’s Black Friday and China’s Singles’ Day on November 11 were also cited as areas of interest. Earnings and share-price performance in the cosmetics sector vary by company. Exchange rates and initial costs of overseas expansion are weighing on profitability, and some major companies have reported results below expectations. By contrast, growing sales volumes for brands are positive for cosmetics ODM and OEM companies. Even if export momentum holds, it is important to distinguish that generating actual profits from overseas operations may take time. Solar, secondary batteries and energy storage systems (ESS) took a breather after surging in the previous session on expectations of a Democratic victory. The market continued to anticipate policy support for clean energy industries, but trading in each sector shifted from day to day. Institutional flows rotated among defense, secondary batteries, cosmetics and entertainment, resulting in a market characterized by strong sector rotation and few clear medium-term leaders. Sector Readings Remain Mixed in the Immediate Aftermath of the Election Initial readings on U.S. sectors diverged, citing regulatory pressure on big tech, delays to crypto-related legislation, uncertainty over defense budgets and the possibility of tighter rules for banks and credit card companies. By contrast, expectations of stronger support for the Affordable Care Act were cited as a positive for health insurers and hospital-related stocks. Despite concerns that crypto legislation could be delayed, Bitcoin recovered to $80,000, underscoring the varied responses across sectors. Defense stocks faced concerns about cuts to military budgets, but demand remains to replenish weapons used during the war in Iran. Expanded health insurance coverage could create opportunities for hospitals, while pressure to lower drug prices could weigh on pharmaceutical and biotech companies. As the same policy changes can affect companies differently even within an industry, it is difficult to treat surface-level interpretations immediately after the election as long-term trends. Market participants said it would take time for sector directions to become established, given how recently the election results came in. U.S. market holidays and lower trading volumes in late November, coinciding with year-end vacations for investors and analysts, could thin liquidity. For now, the priority is to reduce sharp volatility and assess employment and inflation data as well as corporate earnings. [Kwangsoo's Take] Invest in the Next Era Rather Than Protecting Today's Profits Lee Kwang-soo emphasized the choice of “cannibalization”—investing in a new business that could eat into an existing one—through the contrasting transitions of Kodak and Netflix. Kodak engineer Steve Sasson invented the digital camera in 1975, but management, seeking to protect its film business, did not actively pursue the new venture, and the company eventually filed for bankruptcy protection in 2012. Netflix, by contrast, moved into streaming even as its DVD rental business was thriving, deciding to scale back its existing business. After Netflix announced its shift to streaming in 2011, DVD subscribers fell by 800,000 over three months and its share price dropped from around $300 to $77, but the stock rose sharply over the longer term. Lee argued that companies can miss opportunities in the next era if they focus on preserving current earnings and existing businesses. His point was that a decision to sacrifice part of today’s profits to prepare for future businesses can determine a company’s long-term survival. He applied this reasoning to the AI strategies of Google and Apple. Google, whose search advertising business faces a challenge from AI, is continuing to make large-scale AI investments, while Apple appears focused on protecting its existing iPhone business, he said. Lee argued that investors, too, should look beyond short-term share-price declines and current stability and assess companies preparing for industrial change from a long-term perspective. [Kwangsoo's Take] Do Not Give In to Fear, but Set a Loss Limit You Can Bear Citing Warren Buffett’s announcement that he was buying U.S. stocks as share prices plunged during the 2008 financial crisis, Lee Kwang-soo said investors should reconsider fear and greed from the opposite perspective. If investors became greedy when South Korean equities surged, they should have treated that period with caution; but when everyone is fearful, as now, they should not make another poor choice because of past mistakes, he said. He said sentiment in the current market may have swung to an extreme, with all news about semiconductors and AI being interpreted negatively. His view was that concerns were dominating the market despite no major change in fundamentals or existing demand. However, he stressed that refusing to sell solely because one has a long-term positive view of the market is a separate matter from reducing holdings when losses exceed what one can afford to bear. Lee argued that efforts to support the domestic stock market are needed from the government, companies, the securities industry and investors alike. As with Chinese authorities’ moves to support the market decline through share buybacks and liquidity provision, the actions taken to build market confidence matter in themselves, he said. Even if share prices do not rebound immediately, sustained efforts to support the market can build investor confidence.