South Korean stocks tumble into bear market after AI boom

South Korea's stock market is experiencing a dramatic reversal, with the KOSPI index officially entering a bear market after a 25% drop from its recent peak. Despite this sharp correction, the index has still gained approximately 60% year-to-date, maintaining its position as the world's top-performing major stock market.

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This correction is a wake-up call for the market.

The AI-fueled rally, primarily driven by demand for high-bandwidth memory (HBM) benefiting semiconductor giants like Samsung Electronics and SK Hynix, propelled the KOSPI to record highs. However, this surge also highlighted structural risks within the South Korean market, including rapidly increasing margin trading, excessive concentration of funds in a few large-cap stocks, and stock price increases diverging from broader economic fundamentals.

Analysts warn that the recent correction serves as a wake-up call. While it may present opportunities for investors who previously missed out, it also underscores the significant price volatility associated with chip stocks, even with their growth potential. The market's instability is exemplified by SK Hynix, whose stock price experienced a threefold increase before a sharp 14% drop, dragging down the KOSPI. With Samsung Electronics and SK Hynix alone accounting for over 50% of the KOSPI's weight, the performance of these two companies heavily influences the entire index.

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Many people, believing Samsung to be the most representative company in South Korea, underestimated the risks of leveraged investment, only thinking about how gains would be magnified, but ignoring that losses would also be magnified.

South Korean regulators are increasing their vigilance, with the KOSPI volatility index reaching unprecedented levels. The Financial Supervisory Service is monitoring financial products for potential over-marketing, while the central bank is watching single-stock ETFs for market price distortions. Foreign investors have been net sellers, largely due to portfolio rebalancing as the market's value rapidly expanded. Meanwhile, domestic retail investors have become the primary buyers, with margin trading balances remaining high, raising concerns about the market's increasing reliance on retail participation and leverage.

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Compared to Nvidia, which accounts for only about 7% of the S&P 500 index, the South Korean market is more easily influenced by a few large-cap stocks, so the magnifying effect of single-stock leveraged products on market volatility is even more pronounced.