South Korea's stock market suffered a sharp selloff in July as the year's most popular artificial intelligence trades were unwound en masse, making it the worst-performing major global equity market in the third quarter.
Dragged down by a selloff in memory chip stocks at the start of the quarter, the KOSPI fell 18.8% over the three months ending September 30. Betting on companies such as Samsung Electronics and SK Hynix had been one of the most mainstream ways for investors to express a bullish view on the AI sector.
Prashant Bhayani, chief investment officer for Asia at BNP Paribas Wealth Management, said South Korea's stock market has become a bellwether for investors assessing the prospects of massive AI infrastructure spending. The blowup of Leopold Aschenbrenner's hedge fund Situational Awareness, which held heavily leveraged positions in South Korean memory chip stocks, combined with feverish retail investor demand for leveraged single-stock ETFs and excessively exuberant market sentiment, triggered a concentrated unwinding of positions in July.
Now, expectations of rising global bond yields may bring an end to a record-breaking rally in South Korean stocks — the index has gained more than 185% since the start of 2025.
"I think the bond market will weigh on equities, and this is a global phenomenon," said Jongmin Shim, head of Korea research at CLSA. BNP Paribas's Bhayani said that after the July selloff, South Korean market valuations have become more attractive, but a significant re-rating is unlikely. "The market can deliver reasonable returns, but expecting another 70% gain is basically impossible."
Valuations have already contracted. Samsung Electronics and SK Hynix together account for roughly half of the South Korean stock market's total capitalization, and their forward price-to-earnings ratios have fallen back to the 4-to-5 times range.
Joshua Crabb, head of Asia-Pacific equities at Robeco, said rising bond yields represent a "headwind" for South Korean stocks, but he also noted that South Korean chip companies' current P/E ratios have dropped to low single digits, so the direct impact on valuations may be limited.
Some argue that low P/E ratios do not necessarily mean chip stocks are cheap. S&P Global Market Intelligence noted in an August report that there are concerns about cyclical oversupply risks in the industry, which could pressure corporate earnings going forward.
Meanwhile, South Korea's economy is showing signs of overheating, with housing prices rising alongside the stock market. The Bank of Korea is raising interest rates to curb inflation. CLSA's Shim believes this will further drag on market returns.
However, Shim remains optimistic about the outlook for South Korean chip companies. He believes that despite sharply rising financing costs and companies' growing reliance on debt to fund capital expenditure, major U.S. cloud providers will continue to spend. "AI companies have no choice but to keep investing — this is a life-or-death battle," Shim said.
Memory chips are critical for AI inference, as large models rely on inference capabilities to generate responses and perform tasks through chatbots and intelligent agents. High-bandwidth memory, which consists of vertically stacked DRAM chips, is also a core component of Nvidia's AI products, and this market is dominated by Samsung and SK Hynix. Both South Korean companies have benefited from robust AI demand, and prices for conventional DRAM and NAND flash memory have also risen sharply.
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