Can South Korea’s hot streak continue?

This text is an on-site model of our Unhedged publication. Premium subscribers can join right here to get the publication delivered each weekday. Normal subscribers can improve to Premium right here, or discover all FT newslettersGood morning. Nvidia’s shares fell and Alphabet’s rose yesterday. Google has been quietly making its approach in the direction of changing into “the clear-cut AI chief”, our colleagues reported, together with making inroads in chip design. Nvidia’s response: “We’re delighted by Google’s success — they’ve made nice advances in AI.” At Unhedged, we’re infuriated by our rivals’ successes, however you do you, Nvidia. Unhedged will probably be off for the remainder of the week, celebrating Thanksgiving. We’ll be again in your inboxes on Monday morning. Within the meantime, e mail us: unhedged@ft.com. Korean stocksKorea’s Kospi is the best-performing huge world inventory index this yr, with positive aspects of 61 per cent. A lot of the credit score goes to the market-friendly insurance policies and company governance reforms of recent president Lee Jae Myung. And half of the present rally is a catch-up after a tough few years with weak home demand and political turmoil. “Over a two-year interval, it’s simply in keeping with the Asia benchmark,” Peter Kim of KB Securities instructed Unhedged:However, simply as with the US market, the AI increase has been an enormous driver. Samsung Electronics and SK Hynix — chipmakers and the 2 greatest shares within the index — have rallied 87 per cent and 198 per cent this yr, respectively (Samsung Electronics will get about 57 per cent of its working revenue from its semiconductor enterprise). Is the Korean market as depending on the AI increase because the US market? In brief, sure. Mixed, Samsung Electronics and SK Hynix account for about 31 per cent of the Kospi. The 2 firms, which give high-bandwidth reminiscence chips to Nvidia and AI firms, bought off alongside Nvidia final week. The MSCI Korea index is much more skewed in the direction of these two names than the Kospi:There’s a vital distinction, nevertheless: Korean shares are, on commonplace metrics, less expensive than their American friends. Samsung Electronics trades at a worth/earnings ratio of 20, and SK Hynix at 10. Compared, US-based reminiscence specialist Micron trades at a p/e of 29. A sectoral breakdown from Goldman Sachs exhibits how low cost your entire Korean market is: As well as, ongoing company governance reform — company boards’ fiduciary responsibility to minority shareholders was made official solely this yr — gives an upside that’s unbiased of AI. Kim of KB Securities believes the market reforms will present one thing of a “security web” for the Kospi, ought to the AI commerce lose its lustre. Jonathan Pines at Federated Hermes instructed Unhedged that “half of this rally is normal rewriting due to improved governance”. However, he added, regulatory reform will get more durable from right here — particularly with regards to household management of public firms:Folks speak about ‘can Korea turn into Japan?’ However I feel a key obstacle, for now, that may forestall Korea from being nearly as good a marketplace for traders as Japan, is the management subject. You’ve bought [about] 90 per cent of [listed] firms managed by households; in the event that they enhance governance on a voluntary foundation, they are going to be hurting their very own pursuits. So that you’ve bought this inherent resistance in Korea that you simply don’t have in Japan.(Kim)AI-backed securitiesThe world wants numerous new AI infrastructure, or not less than thinks it does. A latest report from JPMorgan estimates that, between now and 2030, the invoice for the build-out of information centres and associated energy infrastructure will run to greater than $5tn. If that’s proper, each conceivable flavour of fairness and debt financing will probably be wanted.The securitised debt market is already making a contribution. Moody’s rankings thinks there will probably be about 30 knowledge centre asset-backed safety offers this yr, including as much as about $15bn in new financing. On prime of that, Moody’s thinks there will probably be $11bn value of business mortgage-backed securities backed by knowledge centres this yr. Mixed, that’s virtually double the financing quantity of final yr. And subsequent yr will in all probability be a lot larger nonetheless.However the securitisation market might wrestle to soak up the quantity of debt the AI increase will throw its approach. Chong Sin of JPMorgan writes that “whereas nothing is unimaginable, in our conversations with funding grade ABS and CMBS traders, one often-cited concern is whether or not they wish to tackle the residual worth danger of information centres when the bonds mature”.Unhedged spoke to a number of ABS traders and analysts this week, and so they do certainly have issues about the long run. As constructed, most securitised knowledge centre loans are issued when the centre has been constructed and leased to a buyer on a long-term contract. The mortgage proceeds go to remove the (riskier) undertaking financing that paid for the development. Crucially, these are virtually all the time non-amortising loans: the funds don’t go in the direction of decreasing the quantity owed. As an alternative, they’re perpetual financing for what’s assumed to be a perpetual asset. The belief is that on the finish of the time period of the mortgage — usually 5 to seven years — the entire steadiness will probably be refinanced.This mix of asset and financing construction may make you a bit jumpy, as a result of the “darkish worth” of a knowledge centre — its worth with no tenant in it — is roughly zero. “It’s 4 partitions with energy, water and cooling mechanisms,” as one ABS investor put it to Unhedged. It has no different use, and it’s usually in the midst of nowhere. “You don’t wish to be holding the bag of debt when the lease expiry is across the nook,” the investor mentioned.This won’t be an issue for just a few years. For now, there’s way more demand for knowledge centre capability than provide. And tenant leases are usually longer than the tenor of the debt — so long as 15 years. But when long-term knowledge centre demand is weaker than anticipated, maybe due to a technological change, leases will probably be damaged, and contractual protections for house owners and lenders fluctuate.One analyst identified that, due to the provision/demand imbalance, the assessed worth of many knowledge centres is far larger than the price to assemble them. So the fairness traders within the centres may take debt of, say, 60 per cent of the assessed worth of the centre, and realise proceeds sufficient to pay again the development debt and recoup a lot or all the fairness funding. At that time there is no such thing as a money fairness within the undertaking. If there’s bother, the debt holder will probably be alone. “What’s the alignment of curiosity? How a lot fairness is there?” the analyst asks, and the reply is usually unclear from the skin.If the securitisation market goes to soak up as a lot AI debt because the tech trade wants it to soak up, debt constructions are going to have to vary. On the very least, correct amortisation of principal is required.(Armstrong)One good readThe reverse of the spirit of Thanksgiving.FT Unhedged podcastCan’t get sufficient of Unhedged? Take heed to our new podcast, for a 15-minute dive into the newest markets information and monetary headlines, twice per week. Atone for previous editions of the publication right here.Really useful newsletters for youDue Diligence — Prime tales from the world of company finance. Enroll hereThe AI Shift — John Burn-Murdoch and Sarah O’Connor dive into how AI is reworking the world of labor. Enroll right here