High Interest Rates in October: AI Takes the Offensive

Nvidia should remain a core offensive stock in portfolios. This is based on the analysis that its role as an offensive player is clearly defined in the overall market trend.

Executive Director Park Se-ik emphasized that it is time to advance on the offensive through player substitutions.

To change tactics, player substitutions will be made, and defenders will be moved forward to maximize offensive power.

The semiconductor materials, components, and equipment (Sooboojang) sector is currently playing an offensive role. The core of the October strategy is to strengthen defense, then bring up full-backs to involve eight players in the attack during the transition.

The semiconductor Sooboojang sector is currently playing an offensive role, and Executive Director Park Se-ik believes that defenders should be moved up to join the attack.

Past Octobers have often seen crises, such as the Black Monday of 1987 and the Jerome Powell interest rate hike period of 2018. Economic commentator Yoon Ji-ho cited interest rates as the main risk factor in the current market.

The most formidable opponent in the current market is 'interest rates,' and he predicted that breaking through market highs would be difficult if interest rate levels remain as they are now.

He offered an analysis that the market could show an overwhelming trend only if interest rates calm down somewhat.

The recent rise in interest rates is fundamentally due to slowing economic growth rather than oil prices. Countries with low growth rates, such as France, are facing significant difficulties in a high-interest rate environment.

In contrast, the stock markets of the U.S., Korea, Japan, and Taiwan, which have AI industry competitiveness, show relatively robust trends. The possession of an AI industry is a decisive factor determining the strength of a nation's economy and stock market.

The current high-interest rate environment is like facing an opponent with the strength of Spain's national team. It calls for a strategy of refraining from reckless attacks, strengthening defense, and carefully selecting stocks.

There are precedents where markets collapsed after interest rate hikes during the 2000 and 2008 crises. Commentator Yoon Ji-ho analyzed that the key difference in the current interest rate upcycle is whether high rates can support growth.

Contrary to expectations that rates, which rose to 5.5% from 2022 to July 2023, would be cut in 2024 and 2025, they are rising again. It is crucial to closely examine whether high interest rates can support economic growth.

Economic commentator Yoon Ji-ho diagnosed the fundamental cause of rising interest rates as a shortage of available funds. He explained that it is a result of increased demand for money due to the interplay of government fiscal spending and corporate investment cycles.

He warned that in this environment, business management risks are growing as capital procurement becomes more difficult for companies.

In the DCF valuation model, the 10-year long-term interest rate is a key variable. Market confidence that semiconductor companies will continue to generate profits for another 10 years must underpin this.

Commentator Yoon Ji-ho stated that the AI market's attackers, meaning companies focusing on the AI cycle including semiconductor Sooboojang, are clearly visible.

However, he mentioned that the opponent's attack (market risk) is also formidable, making it a confusing period to decide how to deploy defenders, and that he is currently contemplating ideas for portfolio changes.

Commentator Yoon Ji-ho emphasized that the root of a company's value is cash flow, not profit.

He projected that hyperscalers' free cash flow would be negative next year but is expected to realize profits from 2028.

However, he diagnosed that a market 'game changer' must emerge for this cash flow improvement to materialize.

This means a crucial catalyst is needed for hyperscalers to generate profit after 2028.

He analyzed that the current situation, where profits are being generated at the hardware stage, is similar to Cisco's situation during the dot-com bubble.

His judgment is that it is premature to view the market as over since the main AI stocks have not yet been listed.

Executive Director Park Se-ik emphasized that investing in AI service companies is essential from a long-term perspective. He explained that while the current market is focused on hardware companies like Nvidia, service companies are not yet listed.

He predicted that Anthropic's Claude and OpenAI are emerging as key players in the AI service market, and the impact these service companies will have on hardware companies and the overall market when they go public will be significant.

Executive Director Park Se-ik believes that the strategy of holding hardware stocks, including Nvidia, remains valid. He interpreted the recent debate about semiconductor highs as a temporary supply and demand imbalance.

A consolidation period of about six months in a box range is expected until supply and demand normalize, after which the warmth of hardware will spread to Sooboojang (materials, components, equipment) companies.

Executive Director Park Se-ik argues that traditional valuation methods like those of Graham or Warren Buffett cannot fully explain the current market. He believes the current market is an era where 'narrative' serves as an important investment driver.

He anticipated that the market would inevitably move into a cycle where hyperscalers' quantities (Q) increase, and if that materializes after 2028, it will enter a new battle of valuation.

He analyzed that the essence of the semiconductor super cycle lies in quantity (Q) growth rather than price (P) increase, and he believes this narrative will be reflected in the market.

The host suggested the possibility of a simple 'all-in investment' in preparation for a market rise in November, but Executive Director Park Se-ik expressed a negative stance.

He mentioned that simply going all-in without a concrete strategy could be seen as a generational difference in investment approach, requiring careful consideration.