International Conflict, High Interest Rates Spread Risk

A fundamental reason why the conflict between the United States and Iran is difficult to resolve has been pointed out. It is practically impossible for the US to demand Iran's surrender after the US initiated the attack. Moreover, if the US were to pay reparations to Iran, it would essentially admit defeat. Such an admission of defeat would inflict a fatal political blow to the current US administration in the upcoming midterm elections, making a substantive resolution unlikely before then.

Park Jong-yeon, Department Head, stated, "The moment the US pays reparations to Iran, the US would be admitting defeat, and if the US admits defeat, it will undoubtedly lose the midterm elections, so a resolution before the midterm elections is unlikely."

International oil prices have once again surpassed $90 due to the potential for a prolonged US-Iran conflict. This is interpreted as a sign that global geopolitical uncertainty remains high and that a practical solution is absent before the midterm elections. The sustained high oil prices are increasing global inflationary pressures, driving up yields on 10-year US Treasury bonds, and affecting Japan's interest rates, thereby intensifying anxiety across international financial markets.

Park Jong-yeon, Department Head, stated, "It's back up to $90 now, isn't it? That it's back up to $90 means that there's no solution in sight right now."

In the current high-interest rate environment, the cost for companies to procure capital has significantly increased. For instance, Amazon raising capital at an annual interest rate of 7% implies that investments can only proceed if there is a firm conviction that the capital can generate a return of at least 7%. As capital procurement costs rise, companies are forced to increase their required operating profit margins for investment projects.

Park Jong-yeon, Department Head, explained, "Raising capital at an annual interest rate of 7% means that you can only bring in that money if you are certain you can earn more than 7% with it." Increased competition due to infrastructure expansion, coupled with high capital procurement costs, can lead to a decline in corporate profitability.

In large-scale infrastructure investments like data centers, achieving the required rate of return, considering not only capital procurement costs but also a 'safety margin,' is essential for the investment to be worthwhile. For example, a company that procured capital at a 7% interest rate should aim for an operating profit margin of 11.8%, adding at least a 4.8% safety margin. If the operating profit margin is lower, say 8%, the actual profit remaining for the company would be a mere 1%.

Park Jong-yeon, Department Head, pointed out, "If I procured money at 7%, but my operating profit margin is 8%, then only 1% remains for me. Why do that? It would be better to just put the money into US Treasury bonds." This suggests that with low operating profit margins, investing in safe assets like US Treasury bonds might be more efficient.

Currently, memory and power constitute the highest costs in building and operating AI data centers. If companies pursue cost reductions to secure profitability, these two key elements are expected to face pressure first. The memory sector, in particular, involves enormous costs, making it highly likely to face demands for cost reductions in the future.

Park Jong-yeon, Department Head, noted, "Currently, the highest costs in AI data centers are memory, power, and so on. They will need to reduce costs here," implying that this could pose a potential risk to the memory market.

A negative outlook has been presented for the domestic stock market, especially the KOSPI. It is argued that investing in major stocks like SK Hynix or Samsung Electronics without clearly understanding the reasons for their rises and falls can be speculative. Investments made without understanding market movements can lead to principal loss, so investors need to approach them with greater caution.

Park Jong-yeon, Department Head, emphasized, "It's still the same. Don't do KOSPI. SK Hynix, Samsung Electronics—do you know why they rise? Do you know why they fall? If you don't know the reasons for their rises and falls, then doing this is speculation, not investment."