The South Korean stock market, after one of the world's most eye-catching rallies, is now facing a critical stress test. In early trading on Friday, the KOSPI index plunged as much as 6.4%, marking one of its largest intraday drops this year before paring some losses. The market's core pillars, the two major memory chip giants Samsung Electronics Co Ltd and SK Hynix Inc, both tumbled more than 7%, triggering a wave of panic selling. Due to a surge in futures selling pressure, the Korea Exchange even temporarily activated a program trading suspension mechanism to curb market volatility.
This sharp decline occurred against a backdrop of simultaneous adjustments in the global semiconductor sector. The previous day, the U.S. Philadelphia Semiconductor Index (SOX) fell sharply, impacted by Broadcom Inc's AI business guidance falling short of expectations. This sparked investor concerns over overheated valuations in the artificial intelligence (AI) supply chain, which rapidly spread to Asian markets.
However, compared to a normal correction in the U.S. market, South Korea faces a more complex set of issues. The index's over-reliance on a few chip stocks, the rapid expansion of leveraged capital, and potential monetary policy tightening risks are creating a combined pressure on the market.
AI Frenzy Fuels a "Super Bull Run"
As of Thursday this week, the KOSPI index had surged over 100% year-to-date, ranking among the world's best-performing major stock markets. The driving force behind this bull run has almost entirely come from the AI industry chain.
Benefiting from an explosion in demand for High Bandwidth Memory (HBM), SK Hynix Inc and Samsung Electronics Co Ltd have been the biggest beneficiaries of the global AI infrastructure build-out. As a key HBM supplier to NVIDIA Corp, SK Hynix Inc's stock has soared over 250% this year, while Samsung Electronics Co Ltd has gained nearly 200%.
Market research indicates that these two companies have contributed nearly three-quarters of the KOSPI's gains this year. Their combined weighting in the index has risen to around 54%, and their trading volume accounts for nearly half of the total market turnover. While this highly concentrated rally has pushed the index to successive record highs, it has also made the market exceptionally fragile.
Leveraged ETFs Act as an "Accelerant"
Adding to market concerns is the emergence of leverage amplification in the Korean capital market, reminiscent of past bull market peaks. In late May, the Korea Exchange approved the listing of 16 single-stock leveraged and inverse ETF products focused on Samsung Electronics Co Ltd and SK Hynix Inc.
These products quickly attracted massive capital inflows. Data shows that within just five trading days of their launch, trading volume for these products accounted for 21% of the entire Korean ETF market's turnover. Some products saw cumulative trading value exceed 28 trillion won in just three days. The total trading volume for leveraged ETFs centered on these two chip giants approached 37 trillion won in a matter of days.
Retail Enthusiasm Cools While Margin Debt Hits Record High
Another warning signal comes from the market's funding structure. Data from the Korea Financial Investment Association shows that as of May 22nd, investor deposit balances in brokerage accounts had fallen to 121 trillion won from 137 trillion won in mid-May. This indicates that the pace of new capital inflows is slowing.
However, at the same time, margin debt continues to soar. By the end of May, the outstanding balance of margin loans in the Korean market reached a record high of 38 trillion won, an increase of over 10 trillion won since the end of 2025.
Potential Bank of Korea Rate Hike Looms as Next Challenge
The real test for the market may arrive in July. As South Korea's economic growth, semiconductor exports, and trade surplus continue to improve, the new Bank of Korea governor has recently signaled a more hawkish policy stance. The market widely expects the central bank could initiate interest rate hikes as soon as next month.
For a market increasingly characterized by leverage-driven investment, rising rates would mean higher financing costs, reduced attractiveness for leveraged trading, a potential slowdown in ETF inflows, and pressure on high-valuation growth stocks.
Market Outlook
Fundamentally, South Korea's chip industry remains at the heart of the global AI investment wave, and the leading position of Samsung Electronics Co Ltd and SK Hynix Inc in the HBM field is difficult to challenge in the short term.
However, from a market structure perspective, the picture is more concerning: excessive index concentration, rapid expansion of leveraged ETFs, record-high margin balances, slowing new retail capital, and rising rate hike expectations. These factors collectively suggest the South Korean stock market is transitioning from a "one-way rally phase" into a "high-volatility contest phase."
For investors, market movements in the coming weeks may determine whether this AI-driven super bull run is merely a mid-course breather or the beginning of a deeper correction.
Despite the recent spike in volatility, major international investment banks remain optimistic about the long-term prospects for the Korean market. This week, Goldman Sachs significantly raised its 12-month target for the KOSPI to 12,000 points from 9,000, implying about 37% upside from current levels.
Goldman's view is that the AI-driven memory chip super cycle is still in its early stages, HBM supply remains tight, corporate earnings growth in Korea is far exceeding market expectations, and over 60% of listed Korean companies remain undervalued.
It is also noteworthy that SK Hynix Inc is advancing plans for a U.S. listing, receiving positive feedback from international investors. The market believes this will further enhance the influence of Korea's AI industry chain in global capital markets.
Comments