The sharp regulatory action by South Korean authorities has triggered fresh concerns over the overheated artificial intelligence (AI) semiconductor trade, prompting investors to reassess valuations after months of strong gains. While the move has weighed on Korean chipmakers, market experts believe the correction could prove healthy rather than signalling the end of the AI-driven rally.
Speaking to ET Now, Rahul Chadha from Shikhara Investment said the market had been increasingly concerned about leveraged and double-leveraged exchange-traded funds (ETFs), particularly those concentrated in Samsung and SK Hynix.
Healthy Correction in AI Trade
Chadha said semiconductor stocks had become excessively frothy amid the AI boom and noted that his funds had remained underweight on the sector by around 5-6%.
"The moves had got a bit frothy in the semiconductor space... some pullback here is healthy. A more important thing for the AI winners or AI trades is whether we get any clues from the Mag-7 on what they are doing with AI capex. Are they going to maintain this capex, ramp it up, or cut back?"
Demand Outlook Remains Critical
He believes the recent decline could continue modestly before attention shifts back to AI demand and earnings visibility.
"We have seen 10% happen with some of these Korean names, another 5-7% to go. What can truly impact the semiconductor or the AI trade is any kind of pullback in demand."
He added that earnings revisions have remained exceptionally strong due to persistent chip shortages, with supply expected to catch up only in 2028.
Korea Policy Developments Need Monitoring
Besides the semiconductor correction, investors are also tracking discussions around taxing unrealised gains and South Korea's failure to secure developed market status from MSCI.
Chadha said a developed market upgrade was never a certainty because currency convertibility issues remain unresolved.
"People were speculating, but Korea was not really a serious contender for an upgrade to developed market status. On unrealised gains taxation, this is a move one will watch."
India Well Placed in the Near Term
Chadha believes easing geopolitical tensions, softer crude oil prices and the Reserve Bank of India's reserve build-up are supportive for Indian markets in the near term.
"The near resolution of the Middle East conflict, oil coming down, and what the RBI is doing to beef up reserves are all positive."
However, he cautioned that job creation and urban demand will remain key medium-term concerns.
"If you are meeting IT services companies, nobody is looking to hire. Those questions on formal sector job creation and urban demand will come back in six to nine months."
Foreign Investors Are Rotating, Not Exiting
According to Chadha, foreign investors are not abandoning India but are reallocating capital away from traditional large-cap winners toward newer growth opportunities.
"You see FII selling in some of these large-cap, index-heavy names, whereas FIIs have been adding exposure to manufacturing exports and consumer internet companies. There is a rebalance of portfolios happening."
He added that global capital flows will ultimately continue to follow earnings momentum, with AI-driven markets such as Taiwan and South Korea likely to remain attractive if earnings growth stays strong.
