▲ AI PRISM* Personalized Economic Briefing
* Editor's note: AI PRISM (Personalized Report & Insight Summarizing Media) is an artificial intelligence-based personalized news recommendation and summary service developed with support from the Korea Press Foundation. It selects and provides six news items tailored to each reader type.
[Key Issue Briefing]
■ AI big tech cash flow crisis turns real: Morgan Stanley projected that free cash flow deficits at AI-focused big tech companies will hit a record $540 billion next year. Remarks from inside Amazon Web Services that its AI business could run an FCF deficit for two years have become public, spreading distrust about the AI investment cycle as a whole.
■ KOSPI falls at pace seen in past crises: The KOSPI closed at 5,552.74 on the 20th, down 215.27 points, or 3.73%. The index has fallen on eight of the 10 trading days this month for a cumulative decline of 20.72%. Brokerages left room for a further drop to the 5,100-5,150 range, equivalent to a forward price-to-book ratio of 1, and recommended buying in installments.
■ Warning that fiscal burdens are eroding monetary policy independence: The yield on 30-year U.S. Treasury bonds jumped to 5.31%, the highest level since 2007, prompting a string of warnings about fiscal dominance, in which fiscal burdens erode the effect of rate cuts. If market rates fail to fall even after policy rate cuts, portfolios centered on growth stocks are expected to take a direct hit.
[News of Interest to Stock Investors]
1. "Big Tech Free Cash Flow at Worst Next Year, AWS Also Negative for Two Years"
Key points: Morgan Stanley projected that capital spending by AI-focused big tech companies will surge 60% from this year to $1.58 trillion next year, while their FCF deficit hits a record $540 billion. In a transcript of an internal AWS meeting, an executive in charge of AI infrastructure said the FCF deficit could continue for the next two years, delivering a shock to the market. S&P warned that hyperscalers may carry more debt than is known, and Goldman Sachs noted that hedge funds are cutting their exposure to technology stocks at the fastest pace in a decade. As AI investment returns fail to translate into actual cash flow, pressure is also mounting to reassess Korean beneficiary stocks such as chipmakers.
2. Target Prices Slashed as Bottom Stays Out of Sight; Brokerages See Slide to 5,100
Key points: The KOSPI closed at 5,552.74 on the 20th, down 3.73%, falling on eight of the 10 trading days this month for a cumulative decline of 20.72%. The pace rivals the plunges during the Asian financial crisis (25.53% in 1997), the global financial crisis (31.36% in 2008) and COVID-19 (25.74% in 2020), and reflects doubts about AI investment returns combined with concerns about exporters' earnings as the won-dollar exchange rate falls. Between the 14th and the 20th of this month, reports cutting target prices numbered 210, or 4.2 times the 50 reports raising them, and investor deposits fell to 92.0966 trillion won, the lowest in about nine months. iM Securities put the near-term bottom at 5,100-5,340, while Korea Investment & Securities left room for a decline to 5,150 and recommended buying in installments.
3. Despite a 40% Plunge in a Week, Money Floods Into Triple-Leveraged Korea ETF
Key points: Korean investors bought a net $267.67 million (about 350 billion won) of KORU, a U.S.-listed triple-leveraged ETF tracking the Korean stock market, between the 13th and the 19th of this month. Bargain hunters poured in on hopes of a rebound even though the product plunged 40.39% in a week. In the domestic ETF market, 1.3547 trillion won of buying was concentrated last week in three double-leveraged ETFs including KODEX Leverage. Because such products track a multiple of daily returns, however, repeated sharp swings may leave losses only partly recovered even if the underlying index rebounds, so investors need to watch for further volatility.
[Reference News for Stock Investors]
Key points: The yield on 30-year U.S. Treasury notes jumped to 5.31%, the highest level since 2007, and net interest costs for the U.S. federal government are set to approach $1 trillion next year, heightening concerns about fiscal dominance, in which fiscal burdens erode monetary policy. OMFIF argued that central banks should speak out actively on fiscal issues, and KPMG assessed that market rates may not fall even if the Federal Reserve cuts rates. In Korea, Bank of Korea Governor Shin Hyun-song said at a parliamentary audit of government agencies that the central bank would continue to speak out on fiscal sustainability. If fiscal risk undermines expectations for rate cuts themselves, portfolios centered on growth stocks will inevitably take a direct hit.
5. Japan's 20-Year Bond Bid-to-Cover Ratio Hits Record 5.84; SoftBank Credit Risk at Four-Year High
Key points: The bid-to-cover ratio at an auction of Japanese 20-year government bonds hit a record 5.84, signaling a recovery in investor demand for long-dated bonds with high yields. By contrast, credit default swaps on SoftBank, an aggressive investor in AI, jumped to 432 basis points, the highest level in four years. Bloomberg Intelligence estimated that at least $6 billion (about 7.96 trillion won) will flow out of SoftBank by March next year. With credit risk spreading to SoftBank after CoreWeave, the risks of debt-funded AI infrastructure investment as a whole are coming into focus.
Key points: Doosan Fuel Cell won an 823.6 billion won order for fuel cells for AI data centers in the United States, yet resolved to issue 400 billion won of perpetual convertible bonds and bonds with warrants, citing a cash shortage. First-half revenue fell 17.1% and its operating loss widened to 52.2 billion won from 13.5 billion won, while short-term borrowings surged nearly fourfold to 285 billion won from 76 billion won and cash and cash equivalents stood at just 34.8 billion won. Because 80% of the order payments will come in gradually through 2028, upfront spending on raw materials is paradoxically adding to the financial strain. The debt-to-equity ratio is expected to fall to the 130% range from 345.9% after the fundraising, but the terms carry an annual coupon burden of 20 billion won from three years after issuance, and NICE Investors Service voiced concern that the actual debt burden could increase over the short to medium term.
