By Jules Rimmer

The buy-the-dip impulse of late July seems less apparent during this drawdown

Investors are questioning the growth profile of the AI infrastructure boom

July was an ugly month for artificial-intelligence stocks but the correction was short-lived and the rebound fast and meaningful. October has also been an ugly month for the sector but this time around, JPMorgan's global strategy team does not anticipate a recovery anywhere near as speedy and emphatic.

Nikolaos Panigirtzoglou is telling investors that the buy-the-dip mentality is lacking, company buybacks have dwindled, there are fewer short positions in the market to provide a bid when share prices are falling and there are more leveraged assets sitting in exchange-traded funds than there were previously.

The worrying implication for investors who own AI infrastructure stocks then, is that, despite this current selloff, they "do not appear oversold from a positioning or flow perspective."

He notes that the first tremors of this latest shock to AI stocks were once again felt in Korea. Here the two heavyweights of the AI picks-and-shovels trade, memory-chip makers SK Hynix (KR:000660) and Samsung Electronics (KR:005930), have fallen by almost a third in the last month. The catalysts have been the same: concerns about a slowdown in the AI capital-expenditure boom as well as the threat posed by cheaper Chinese competition (CN:688825) undermining growth and margins.

Selling has accelerated throughout the AI ecosystem in recent weeks as investors worry about the growth profile in the teeth of higher interest rates and the struggles of Anthropic and OpenAI to reach profitability. The Philadelphia Semiconductor Index ETF SOX, for instance, has dropped 10% in the last five sessions while a U.S. chip play like Intel (INTC) has plummeted roughly the same amount over that period.

ETF investors, Panigirtzoglou points out, bought into the first South Korean selloff using levered and unlevered funds, but so far in October's Korea selloff 2.0, evidence of this buying is scant.

Flows stemming from equity funds that invest in Korea, both onshore and offshore

Moreover, he observes that there was a significant uptick in short interest for the biggest, U.S.-listed Korean ETF EWY back in July. This month, though, he discerns little change in the short base.

The report also makes the point that the short base in U.S. memory chip ETFs like VanEck Semiconductor SMH or Roundhill Memory DRAM is also rather low so that when markets fall, there are fewer bids in the market to arrest, slow or reverse that fall.

Short interest on US memory stocks (Micron, Sandisk, Western Digital, Seagate)

An additional vulnerability Panigirtzoglou perceives is the assets under management of leveraged memory ETFs, relative to the market capitalization of the underlying stocks. The bigger this ratio, the more extreme the moves can be as leverage exaggerates them. This ratio bottomed out at the end of July but built up again in August and September.

After bumper second-quarter profits both SK Hynix and Samsung Electronics announced buybacks totalling $40 billion that were completed earlier than expected in mid-October. There was no equivalent buyback "cliff" at the end of July, again suggesting this time round, staging a recovery may be more difficult.

-Jules Rimmer

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