Are There Stocks Favored by the Government?... The ‘State Premium’ Attached to Semiconductors, AI, and Defense [Weekend Money]

Policy Funds Flowing into Semiconductors, AI, Defense, and Power Grids
Government Support Brings Upside, But Risk of Overcapacity Looms
"Concerns Over Stifled Innovation and Rising Prices"

The era when governments remained mere referees outside the market is coming to an end. In recent years, major governments have not limited themselves to simply creating regulations or providing subsidies. They have become shareholders in strategic industries, acted as lenders, and sometimes taken on the role of buyers and risk guarantors. This marks the rise of so-called ‘state capitalism.’

Shinhan Investment & Securities recently emphasized in a report that we must pay attention to the spread of state capitalism. Unlike a planned economy, state capitalism does not eliminate the market. Rather, it leaves the market in place while altering risk and return structures so that capital flows into industries favored by the state. Tools such as subsidies, tax credits, low-interest loans, price guarantees, government procurement, and equity investments are all utilized.

However, this does not mean the market is entirely excluded as in a planned economy. Instead, the state uses ‘market economy’ as a tool to achieve ‘national strategy’. In effect, this concept sits between a free market economy and a planned economy.

The United States best exemplifies this change. The U.S. government secured a 10% stake by injecting 8.9 billion dollars (approximately 12.2883 trillion won) into Intel, and in the acquisition process of US Steel by Nippon Steel, it obtained rights through a golden share (a special share that grants significant voting power regardless of ownership ratio) to intervene in key strategic decisions. For Nvidia and AMD, a new structure was established for the government to receive 15% of related revenues in exchange for granting export licenses for AI chips to China. In these ways, the government has become both a regulator and an economic participant.

The background to this trend is the power rivalry between the United States and China. In the era of globalization, producing in cheaper locations benefited corporate profits and stock prices. However, after experiencing the COVID-19 pandemic, war, and supply chain disruptions, countries realized that “the cheapest option is not always the best.” Now, economic policies must not only prioritize low prices but also ensure supply chain stability and security. Shinhan Investment & Securities analyst Kim Seonghwan explained, “As long as the power struggle continues, governments cannot pursue efficiency alone,” adding, “They must actively guide capital into strategic industries to secure stable returns.”

A new premium may emerge in the stock market. Analyst Kim referred to this as a “strategic asset premium.” For industries deemed strategically important by the state—such as semiconductors, AI infrastructure, shipbuilding, space, defense, nuclear power, rare earths, and power grids—the government is unlikely to let them fail easily. According to Kim, “these industries can be seen as holding an implicit government put option,” which means, “the cost of capital and credit risk for these sectors will be lower, and profits could structurally increase.”

However, state capitalism does not guarantee good news for the stock market. Sectors favored by the government attract large capital inflows and increased facility investment, benefiting stock prices in the short term. But if all countries invest simultaneously in the same strategic sectors, supply gluts may arise in the long run. There is also the risk that shareholder value is placed behind national strategy.

Financial markets will also be affected. Supporting strategic industries means increased fiscal spending for governments, while private companies also expand capital investments. When both the government and corporations compete for funding in the capital markets, structural rises in long-term interest rates and term premiums may occur. The cost of securing stable supply chains is also likely to be reflected in inflation.

Analyst Kim warned, “Under state capitalism, even sectors with low return on invested capital (ROIC) may artificially attract funding, potentially undermining the efficiency of both the economy and the financial markets. In the long run, this could stifle disruptive economic innovation.”

This content was produced with the assistance of AI translation services.