South Korea’s stock market plunges as AI-driven boom fades

South Korea's stock market is experiencing a severe downturn, with the benchmark KOSPI index dropping significantly for two consecutive sessions. The market has lost about $2.18 trillion in value, putting it on track for its steepest monthly decline on record. This sharp fall follows a period of strong growth, particularly in chipmakers that benefited from artificial intelligence investments.

Investors are facing substantial losses as interest wanes in previously high-flying AI-related stocks. Frank Benzimra, head of Asia equity strategy at Societe Generale, noted that the stocks experiencing the most significant drops are those with the highest leverage. He expressed uncertainty about when the selloff will end, stating that it is currently not a favorable trading environment.

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If you look at what is falling in the market, it has been the stocks in which you have the most leverage.

In response to the crisis, South Korean Finance Minister Koo Yun-cheol apologized for the introduction of single-stock leveraged exchange-traded funds (ETFs), admitting they were not thoroughly considered. The government is now reviewing market stabilization measures, including stricter regulations on these funds, which some analysts blame for increasing leveraged trading. The Bank of Korea governor and financial regulators met to discuss the situation, two weeks after announcing tighter regulations on ETFs.

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It’s very difficult to say when will this selloff end, but at the moment, it’s definitely not the trade where we want to be.

The Ministry of Finance announced plans for immediate curbs on single-stock leveraged products. These include individual investment limits, potentially capping leveraged ETF investments at 20 percent of an investor's total portfolio, and higher trading costs to discourage excessive activity. The ministry will also establish a legal framework for emergency market-stabilization steps.

Despite the current turmoil, the KOSPI index remains the best-performing major market year-to-date, up 41.5 percent in U.S. dollar terms. This highlights the dramatic volatility experienced in the South Korean market.

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There [were] definitely signs of panic and forced unwind in Asia technology today, not only on the long side, but also on the short side in Japan, where you saw heavily out-of-favour names such as Nintendo and Sony rallying very strongly to compound the pain.