Asia’s AI Stock Frenzy Is a Warning Sign for Global Markets

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2:07The KOSPI about a month ago was down 8 % two days in a row and then up 8 % on the third day and then rallied to new highs. It's an especially better rollercoaster week for the KOSPI in South Korea. There's been plenty of volatility. But if you zoom out, the bigger picture tells another story. Korea's cost per index has nearly tripled over the past year, and Taiwan's Thai Yax has more than doubled. That kind of gains makes the U.S. market look like it's a standstill. Charlotte Yang covers Asian markets for Bloomberg. She says the rally comes down to one thing, AI. Tech giants like Amazon, Google, Meta, and Microsoft are spending hundreds of billions a year building out AI infrastructure.

2:50And all of that runs on advanced chips and semiconductors, many of them made in Korea and Taiwan. We're talking about companies like Taiwan's TSMC, that's the world's largest chip foundry. And in Korea, the edge is laser-focused on memory chips. SK Hynix and Samsung really dominate this segment. The explosive demand for these chips has helped turn these firms into some of the most profitable in the world. And as these Asian chipmaker stocks kept climbing, retail investors piled in, hoping to cash in on the rally. They think that this is a one single generation rally and where's property so expensive?

3:34My salary is not keeping up with inflation. Going into the stock market is my best way to make quick money. Retail investors in both markets have always been active, but this time their behavior looks different. In Taiwan, many are borrowing heavily to buy more stocks. In Korea, some are turning to risky structured products to boost returns. Bloomberg opinion columnist Shuli Ren says it's this rapid buildup of leverage that's now raising alarm bells. Until you sell your holdings, these are just paper gains that can evaporate overnight. If the market suddenly turns, you end up with nothing. And possibly the capital came with a lot of leverage.

4:17the kind of wealth destruction that we could see, it could be tremendous, right? And those risks may not stop with individual investors. As markets grow more volatile and retail investors dive in deeper, Charlotte says the consequences could spread further. I think today the markets are far more interconnected than before. And just looking at the sharp downturns the other day we saw with Cosby, KOSPI experienced a 10 % drop and is quickly filtered into Nikkei, into Chinese market, and ultimately into the U.S. overnight session. So I think that illustrates how a shocking career or anywhere in Asia's tax sector can quickly ripple through and affect in U.S.

5:00markets in a way people didn't anticipate before.

5:07This is The Big Take Asia from Bloomberg News. I'm Rebecca Chung Wilkins, in for Wan Ha. Every week we take you inside some of the world's biggest and most powerful economies and the markets, tycoons and businesses that drive this ever-shifting region. Today on the show, how individual investors in Taiwan and Korea are rolling the dice to try and cash in on the AI rally. What are the consequences for them and their economies? And if things go wrong, how far could the fallout spread?

5:47To see just how widespread Taiwan's investing frenzy has become, Bloomberg went to a small stir-fry joint in Taipei, the island's capital city. The restaurant's called Pinsian Rhechao, and lately it's become famous for something other than the food. NVIDIA CEO Jensen Huang was recently spotted having dinner there. They have round tables with plastic stools. It's loud and a bit messy. But it's cheap and always you can expect good food. Since then, it's become a meeting place for Taiwanese people who are interested in investing in the stock market. So it was a Monday evening and the stock market that day actually sank earlier.

6:27So the benchmark index was down 3.5%. But the mood there and the conversations people were having about the stocks were just still very upbeat. In one corner, there was excited chatter about AI and the market and whether they should be taking advantage of the day's decline and buy more stocks on the cheap. And in another corner, you have a middle-aged man. You can hear him lecturing on his friends about the in and outs of these P ratios and how to use them to pick winners. Bloomberg's Charlotte Yang has spent weeks speaking to retail investors in Taiwan. And she says stock trading has become a regular part of daily life there.

7:08The common phrase that come up in my conversation with them is that they say this has almost become like a national pastime or national movement. Charlotte says that's a real shift. Until recently, investing in the stock market was largely seen as something for finance professionals. But close to half a million people have opened accounts to trade in the Taiwan stock market in the first half of this year. Many are investing for the first time, attracted by the prospect of getting rich quick. If you buy 1 ,000 shares of TSMC over the past year, you just buy it and then you put it there. You'll be making$41 ,000.

7:46To put into context, that is more than double the median annual salary in Taiwan. And it's also more than the annual salary of many hardworking white-collar office jobs. Their big argument is that this rally is really backed by the fundamentals and strong earnings delivery. So unlike the dot-com era, which is dominated by companies with minimum revenues or some unproven business models, this time the leaders of this AI rally, like TSMC, SK Heineken, Samsung, They're highly profitable with real technology edge and also strong client demand that their supply capacity simply just cannot meet up with.

8:24And so long as that continues and the valuation is not expensive, the rally has more to go. That belief has helped push stock investing to a fever pitch in Taiwan. For some investors, putting in just their savings isn't enough. They're borrowing money to buy even more stocks. with the market frenzy in full swing. People are really putting whatever idle cash they have into the stocks. And also they're borrowing from brokers in margin loans and also in unrestricted loans. What that means is people would pledge their stock holdings and ETF holdings to get more cash. They also turned to the borrowing from banks, like in personal credit or in other type of loans.

9:07For many investors, borrowing to invest looks like a smart bet. Interest rates in Taiwan are low. And if stocks like TSMC keep delivering huge returns, investors figure they can easily cover the cost of a loan and still come out ahead. So if you get bank loans, you analyze interest rates about 2 % to 3%. And if you do a little bit of calculation, like I put my money into TSMC or like the mainstream popular ETFs, I will be generating 50 % return year to date. Over the past 12 months, margin loans, or money investors borrow from brokerages to buy stocks, have surged 160%. Last week, margin loans hit an all-time high, overtaking the previous record set just before the dot-com bubble burst in 2000.

9:55Meanwhile, loans backed by stocks and ETFs, where investors pledged their portfolios as collateral, hit a record high in April. That's what worries some market watchers. Not just that stocks have risen so fast, but that more of the rally is being built on borrowed money and too much optimism. The biggest worry people have right now is what if you see a quick shift in global AI sentiment. And because Taiwan's market and economy are so tied to AI, so tied to the tech industry, We have 80 % of the benchmark tied to tech and 20 % of GDP is from the tech industry. So any of that shift combined with a rapid buildup in leverages, you could easily see very ugly selling.

10:45So what happens if people suddenly lose confidence in AI? How bad could it get? And how far could the damage spread? That plus the hidden dangers behind one of the most popular and riskiest trades on Korean stocks. That's after the break. The thing about AI for business, it may not automatically fit the way your business works. At IBM, we've seen this firsthand. But by embedding AI across HR, IT, and procurement processes, we've reduced costs by millions, slash repetitive tasks, and freed thousands of hours for strategic work. Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business.

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13:46As AI stocks keep climbing, financial firms are rolling out new ways for investors to bet on the Korea-Taiwan rally. Before we get into the nuts and bolts of this, you first need to understand one of the fastest growing products they've promoted, leveraged single stock ETFs. Now, most ETFs or exchange traded funds are pooled investment vehicles like mutual funds. They hold baskets of securities like stocks, bonds or commodities. But unlike mutual funds, they trade on major stock exchanges, just like an individual stock. Leveraged single-stock ETFs, however, are different. For one thing, they track just one stock instead of a basket.

14:28For another, they use derivatives to magnify returns. And that can make them much riskier. Here's Bloomberg opinion columnist Shuli Ren. Leveraged single-stock ETFs amplify exposure to some stock that the investor is very bullish on. You can, say, buy 2x leveraged ETFs. So with this kind of ETFs, you don't need to maintain a margin account. You don't have to understand options, which can be quite complicated. And they trade kind of like stocks. That's why it's very popular. Super popular in Korea, where more than a dozen of these new leveraged ETFs debuted in May. And where most of the buyers, more than 90%, aren't pension funds or insurance companies.

15:14They're retail investors who have pumped$9 billion into these products. They buy them because the returns can be staggering. Take, for example, a Hong Kong-listed single-stock leverage ETF tied to SK Hynix, the Korean memory chip maker. It's designed to deliver twice the stock's daily return. If you were an investor who bought into this ETF at the beginning of the year, you're up 790%. That's because Hinex has been doing very well throughout the year. But the math behind these products gets complicated fast. Shuli says these products are built for short-term trading, sometimes just over a single day, not long-term investing.

15:58Most retail investors buy and hold for a period of time. Great if a company's stock keeps going up, But if it falls or cycles up and down, things can get messy. When markets get choppy, even if the underlying stock is ending up breaking even, this kind of 2x ETFs, you'll still be losing money. So if you bought into this ETF at the beginning of June, when the stock starts to become very volatile and it starts to whipsaw, you are actually better off buying the underlying stock. Do you think there are risks that retail investors are not getting, that the institutional investors are seeing? Well, the biggest risk is valuation.

16:44I mean, I'm sorry to say this, but the Samsung and Hinex are starting to trade like mean stocks. And they're trillion-dollar companies. Investors, they're not really considering valuation. In fact, imagination matters a lot more than valuation. And that's quite dangerous because if the market suddenly turns, Some retail investors will be getting margin calls, and that's quite dangerous. Investors who borrowed money to buy stocks get margin calls from their brokerages when the value of the stocks fall below a certain level. Investors are asked to put in more money to make up for the losses. For most people, the easiest way is to sell the stock.

17:24And this kind of forced selling propels prices into a downward spiral. Shuli says what worries her even more is the all-in mentality taking hold among some investors. I heard from a teenager from Taiwan. She was saying that the saying is sell your house, sell your cars and buy TSMC. That's the problem. Until you sell your holdings, these are just paper gains that can evaporate overnight. So the risk is that you think you are making 100 % returns this year on paper. If that return reverses, suddenly you end up with nothing. It could possibly traumatize a new generation of investors. What we saw after Japan's economy's bubble burst was that Japanese people have turned very cautious, right?

18:14Like if you get burned very early on in your 20s or 30s, that could really change your risk appetite and the risk attitude for decades to come. That's the risk for the investor. The risk for the company is that these ETFs have become so popular with speculators that they can drive a stock artificially high. And then there's the risk to the market itself. There's now a concern that these kinds of risky bets are becoming large enough to influence trading in some markets. In Korea, retail investor demand for certain stocks has created volatility so extreme that the country's securities exchange had to temporarily suspend trading five times this year to curb losses.

18:55The retail investor participation is a global trend. It's not just in South Korea and Taiwan or US, right? Hong Kong, China. I mean, in China, everyone is a retail trader. And I think that's a trend that's worth watching. The retail buying frenzy is already affecting the Korean and Taiwanese stock markets in another potentially more serious way. These investors are buying at the same time that foreign and institutional investors are selling. Since the beginning of this year, foreign investors sold more than$90 billion in Korean stocks and$20 billion worth of Taiwanese stocks. Institutional investors, they just feel like they're being overexposed to South Korea and Taiwan.

19:42They have been selling this year. So retail investors, on the other hand, have been buying whenever foreigners are selling. They are actually the ones that are pushing Taiwan and South Korea's markets to new record highs. If there is a real unwind, we can see stocks down by 20, 30 percent overnight. And that can create a lot of shock to the financial system because Taiwan and South Korea have so many semiconductor companies. If there are crashes in these markets, the U.S. market is not going to do so well because they all have to benchmark against each other. If, say, Hinex tumbles by 20 percent that day, you will see the U.S.

20:28market not opening so well. And we have already seen that. Still, Shuli says she doesn't think the AI boom is about to unwind just yet.

21:02mechanics is turning against the suppliers, then the valuation will have to fall, just because they are cyclical industries. What comes up must come down. Yes, absolutely. Because the supply-demand dynamics change very quickly. This is The Big Take Asia from Bloomberg News. I'm Rebecca Cheung-Wilkins. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you liked the episode, make sure to subscribe and review The Big Take Asia wherever you listen to podcasts. It helps people find the show. Thank you for listening. See you next time.

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