The $4.7 trillion South Korean stock market, which has surged at a remarkable pace this year, is now showing signs of strain.
The Kospi index closed down 5.5% on Friday, with Samsung Electronics Co Ltd and SK Hynix Inc falling at least 6%. Foreign investors sold an additional 3.5 trillion won (approximately $2.3 billion) worth of Kospi constituents, bringing their cumulative sales for the week to over $10 billion. The South Korean won fell to its lowest level since March 2009.
Investor sentiment towards the South Korean market has been divided. Market bulls have largely dismissed the won's depreciation, focusing instead on the exponential growth in corporate earnings. However, Friday's synchronized decline across various asset classes, including bonds, highlighted an unfavorable macro environment: persistently high oil prices due to the prolonged Iran-Israel conflict and heightened risks of interest rate hikes.
KB Securities economist Oh Jaeyoung noted that the won's decline, fueled by rising oil prices, was exacerbated by foreign selling of South Korean stocks; this pressure was further amplified as the Kospi fell. From a short-term market sentiment perspective, the won may still have room to decline further.
The most significant underlying concern is the lack of market breadth. As of Thursday, the Kospi index had soared over 100% year-to-date, but the gains have been highly concentrated in Samsung Electronics Co Ltd and SK Hynix Inc. This concentration leaves the market vulnerable to a sudden loss of momentum in AI-related trading.
"Valuations in some parts of the AI ecosystem have become elevated," said Jung In Yun, CEO of Fibonacci Asset Management Global. "Short-term volatility may remain high, but we do not believe this indicates a change in the overall trend."
According to data from the Korea Exchange, driven by AI-fueled chip demand, Samsung Electronics Co Ltd and SK Hynix Inc together account for 54% of the Kospi's market capitalization and represented about half of the average daily trading volume in May.
Single-stock leveraged ETFs tied to Samsung Electronics Co Ltd and SK Hynix Inc are also deepening market anxieties. Exchange data shows that in the first five trading days since their listing on May 27, the four most popular single-stock ETFs accounted for 21% of total South Korean ETF trading volume.
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