'Dotcom Bubble' During the Late 1990s DJ Administration
Three Key Factors: Internet Popularization, Government Policy, and Liquidity
Similarities with Recent Domestic Situation... Potential for a Mini Bubble
On June 11, NH Investment & Securities released a report titled "Potential for a Mini AI Bubble: What Could Trigger a Korean Dotcom Bubble?" The report analyzed that, although Korea has been left out of the global AI rally so far, the country could experience a mini bubble similar to the 'dotcom bubble' of the late 1990s, driven by the three factors of AI popularization, government policy, and liquidity.
The Korean stock market has been excluded from the global AI rally that began in 2023. The AI rally started in the United States in November 2022, when OpenAI launched ChatGPT. Nvidia, which manufactures AI semiconductors, led the rally, and most companies in the AI semiconductor value chain saw significant stock price increases. In Korea, some HBM-related companies such as SK Hynix emerged as AI beneficiaries, but the overall stock market's expectations were limited due to delays in Samsung Electronics' supply of HBM to Nvidia. At the beginning of this year, the DeepSeek shock in China raised hopes for high-performance AI development outside the US, but even then, stock price increases for domestic software companies developing Korean-style AI remained limited.
The situation in Korea just before the dotcom bubble was similar. In the US, the dotcom bubble began after the 1995 IPO of web browser developer Netscape, but in Korea, there were widespread concerns about falling behind in the internet race. At the time, internet infrastructure was poor and the software industry was just emerging. Furthermore, the IMF financial crisis reduced demand, making growth sluggish. However, with the inauguration of the Kim Dae-jung (DJ) administration at the end of 1998, the financial crisis was quickly overcome. The combination of internet popularization, active government policy, and improved liquidity conditions led to the start of the dotcom bubble in Korea from 1999.
1. Internet Popularization = AI Popularization
In the late 1990s, the popularization of the internet led to increased demand for internet services, which became the background for the emergence of various IT companies in both the US and Korea, including Daum (1995), Interpark (1996), and Naver (1999). As generative AI represented by ChatGPT marks the starting point for AI popularization, a variety of AI companies and services such as FuriosaAI, RYUTTEN, SelvasAI, and Exaone are rapidly emerging in Korea as well.
2. DJ Administration's IT Promotion Policy = Lee Jaemyung Administration's AI Promotion Policy
While the popularization of the internet provided the foundation for the emergence of Korean internet companies, the Kim Dae-jung administration's IT industry promotion policy accelerated their growth. In particular, the government actively expanded internet infrastructure such as optical communication networks, making Korea the country with the world's fastest internet at the time and greatly contributing to internet penetration and industry growth. The newly inaugurated Lee Jaemyung administration has announced that it will strongly pursue AI as a core growth engine, focusing on the development of Korean-style AI, expanding research and development (R&D), and building AI infrastructure.
The DJ administration's "Cyber Korea 21" invested a total of 28 trillion won over four years. The Lee Jaemyung administration plans to invest 100 trillion won over five years to fulfill its AI pledges. Considering that Korea's nominal GDP increased 4.5 times during the same period, this is not considered an excessive investment.
3. 1995 FED Rate Cut = This Year’s FED Rate Cut Movement
In July 1995, the US Federal Reserve (FED) began cutting interest rates to achieve a soft landing. As a result, the supply of market liquidity became another factor supporting the growth of the internet industry. Meanwhile, Korea implemented monetary tightening in response to the rapid outflow of foreign currency during the IMF crisis. However, after implementing IMF restructuring and stabilizing the foreign exchange market, Korea was able to shift to monetary easing from 1998. This improved liquidity conditions in Korea and contributed to the growth of the internet industry.
There are many expectations that the FED will resume rate cuts in the second half of this year. Quantitative tightening (QT) is also expected to end. The Bank of Korea cut the base rate by 25 basis points at the Monetary Policy Board meeting in May in response to the economic slowdown, and there is a high likelihood of additional cuts in the second half of the year. These interest rate forecasts could provide additional upward momentum for Korean AI growth stocks, not only due to policy expectations but also through improved liquidity conditions.
Lee Sangjun, an analyst at NH Investment & Securities, stated, "It is necessary to pay attention to Korean AI growth stocks in the second half of the year." He added, "Of course, due to learning effects, it will be difficult for an extreme bubble or sharp crash to occur, but depending on the scalability of the technology, there is a possibility of a rational level of mini bubble." He also said, "From an index perspective, attention should be paid to the KOSDAQ index, as the proportion of venture and small- to mid-sized companies is higher than in KOSPI, so policy momentum could become even more pronounced due to the structure of the market."
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