South Korean stocks experienced a sharp decline on Tuesday, with the benchmark index triggering a circuit breaker mechanism, as doubts emerged over the sustainability of record profits tied to artificial intelligence (AI), leading to a significant sell-off in chip stocks.
The benchmark Korea Composite Stock Price Index (KOSPI) closed down 395.02 points, or 4.9%, at 7,656.31, after falling as much as 8.2% during the session. This drop has pulled the index down 16% from its record closing high of 9,114.55 reached on June 22, though it remains up 82% for the year-to-date.
This marks the sixth time the index has triggered a circuit breaker during this year's period of heightened volatility in semiconductor stocks, and the twelfth occurrence in its history.
Chipmakers Samsung Electronics Co Ltd and SK Hynix Inc led the declines, closing down sharply by 6.9% and 6.1% respectively, after both saw intraday losses exceeding 10%.
The decline in Samsung Electronics shares came despite the company forecasting a surge of 18 times in its second-quarter operating profit, highlighting market concerns that strong earnings may already be fully priced in following the sector's substantial rally.
An analyst from Mirae Asset Securities noted that while the news was positive, it could not be viewed as entirely bullish because market expectations were already too high to be exceeded, which has intensified worries about the sustainability of high profits.
Semiconductor stocks in neighboring Japan also fell sharply, with memory chipmaker Kioxia Holdings Corp dropping more than 10%.
An analyst from Kiwoom Securities stated that while fundamentals like chip industry profits were not an issue, there was still a need for profit-taking in the market. Simultaneously, various conflicting signals regarding AI and the chip sector were contributing to increased volatility.
Retail investors have been the driving force behind the KOSPI's rally this year, with shares of Samsung Electronics and SK Hynix rising more than 130% and 220% respectively.
On Tuesday, foreign investors were net sellers of stocks worth 2.9 trillion won ($19 billion), while retail investors were net buyers of 3.2 trillion won.
As of last Friday, the amount of borrowed funds used by retail investors to invest in KOSPI-listed stocks stood at 297 trillion won, slightly below the record high of 298 trillion won seen in late June.
An analyst from Mirae Asset Securities suggested that retail investors appear to be actively buying on dips and taking long positions both in the spot market and through exchange-traded funds (ETFs).
Among other major index constituents, battery maker LG Energy Solution Ltd fell 6.4% after the company indicated it expects operating profit for April to June to drop 77%, dragged down by weak battery sales amid soft electric vehicle demand.
Shares of Hanwha Ocean Co Ltd plummeted 22.7% after Canada selected a German submarine over a South Korean contender in a contract bidding process.
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