South Korean stocks experienced a severe downturn on what has been termed a "Black Monday", as investors pulled back from the artificial intelligence (AI)-related bets that had fueled a global market rally. The benchmark Kospi index opened sharply lower, triggering a circuit breaker mechanism. At the time of reporting, the Kospi was down over 8%, with Samsung Electronics shares plunging more than 9% and SK Hynix falling nearly 7%.
The Korea Exchange convened an emergency market assessment meeting to evaluate the ongoing volatility and discuss measures to stabilize market operations. Over recent sessions, concerns over an overheated AI rally, combined with macroeconomic uncertainties—including protracted Middle East geopolitical tensions and strong U.S. non-farm payrolls data boosting expectations for Federal Reserve rate hikes—have dampened the upward momentum for global technology stocks.
The dramatic selloff in South Korean markets follows a significant prior surge, even though the Kospi index remains up 77% year-to-date. Concurrently, foreign capital is accelerating its exit from the South Korean equity market, with net selling of Kospi constituents exceeding $10 billion last week alone.
The impact of unwinding crowded trades is particularly pronounced in South Korea, where billions in retail funds have been leveraged through exchange-traded funds (ETFs) targeting the two chip giants, Samsung Electronics and SK Hynix. Albert Yong, managing partner at Seoul-based hedge fund Petra Capital Management, noted, "Given the extremely crowded positioning in the semiconductor sector and the current volatile environment, a degree of panic selling is not surprising."
Goldman Sachs Offers Contrarian Bullish Outlook
However, Timothy Moe, Chief Asia Pacific Regional Equity Strategist at Goldman Sachs, believes the South Korean market is poised for a rebound following the circuit-breaker-induced plunge. In an interview, Moe stated, "Over a longer time horizon, this will prove to be just a technical correction, albeit a scary one for a long-term bull market." He added, "The fundamentals remain very, very strong."
Moe pointed to clear signs of increased speculative activity, particularly among South Korean retail investors who were keen buyers of leveraged ETFs. "What we are seeing now is that these built-up positions are being forced out, and the leverage is exacerbating the decline," he explained. Moe also highlighted that South Korean stock valuations remain reasonable and expects corporate earnings to continue driving market growth. "After the market washes out, we think the market will re-establish its footing and move to higher highs," he said.
Earlier this month, Moe had suggested the rally in South Korean stocks had further room to run as the country's AI chip leaders continue to drive profit growth. The bank raised its 12-month target for the Kospi index from 9,000 to 12,000 points. Moe and his team maintained their positive stance, stating that "corporate earnings are driving Asian equities higher" and they remain bullish on South Korea given "higher earnings expectations, underappreciated duration of the memory cycle, and catalysts for re-rating."
Leveraged Products Amplify Market Swings
Single-day moves exceeding 5% in the South Korean market have become more common, partly due to the popularity of leveraged ETFs tracking the two major chipmakers and the rebalancing trades these products necessitate. The Kospi 200 Volatility Index, a measure of option prices, has mostly traded at historically high levels relative to the CBOE Volatility Index since early February. Margin debt has also climbed steadily, reaching a record 38 trillion won (approximately $24.4 billion) by the end of May.
Francis Tan, Chief Asia Strategist at Indosuez Wealth Management in Singapore, remarked, "I didn't walk into the office expecting a 'Black Monday,' but in the markets, it's always worth buckling up." He added, "We have been very cognizant of the risks from crowded trades and global market nervousness, especially when geopolitics and valuations are both elevated."
Investor Caution Rises Amid Record Leverage
Some investors are growing increasingly wary of rising retail leverage, concerned that the popularity of leveraged ETFs and the planned launch of weekly single-stock options could amplify moves in an already volatile market. Stephane Martin, Head of Institutional Derivatives Sales for Asia at Optiver, noted last week that while such products are "certainly very interesting" and indicate rising retail participation, they could also leave the market "in a somewhat fragile state" should sentiment reverse.
Furthermore, foreign outflows have become a notable concern. Global funds have net sold a record $76 billion of South Korean stocks this year, maintaining net selling for every session over the past month. While some of this selling stems from technical factors like single-stock position limits, the selling pressure is largely being absorbed by retail investors who are more susceptible to sentiment swings—a structure that may further exacerbate volatility.
Bullish Sentiment Gives Way to Prudent Hedging
The dual forces of the AI boom and successful corporate reform efforts by the South Korean government have attracted global investor attention over the past year, driving the market to repeated new highs. Strong earnings prospects continue to underpin bullish sentiment, but the prolonged rally has also led to excessive concentration in a few large-cap stocks, making the market more vulnerable to sudden reversals.
As more investors grow concerned the rally has become too hot and too fast, optimism is being tempered by caution, with some beginning to hedge positions and reduce crowded trades. Hedge fund Golden Horse Fund Management has reduced risk exposure and increased derivative protections. M&G Investments has trimmed holdings in memory chips and foundry-related stocks, expanding its investment scope further down the AI supply chain.
Analysis of options on the iShares MSCI South Korea ETF shows investors are seeking protection against downside risk. These moves highlight the challenge for global fund managers. While investors remain bullish on Samsung Electronics and SK Hynix, many are becoming more selective with new capital deployment, while holding cash for other market opportunities.
The selloff in U.S. tech stocks last Friday on rate hike fears demonstrated how quickly popular trades can unwind if sentiment shifts—a risk that materialized in South Korea on Monday. Yi Ling Ong, Managing Partner at Golden Horse Fund, stated, "Over the past few weeks, we have been marginally reducing overall risk exposure and gradually adding derivative protection." She noted that several large IPOs, including a potential SpaceX listing this month, could lead to fund rotation as managers raise cash to participate, making it "prudent to hold some dry powder."
This caution is also evident in the derivatives market. Derivatives strategist Tanvir Sandhu observed, "The debate is no longer about whether the Kospi story remains attractive, but how to stay invested without giving back some of the gains." He added that ETF option activity indicates investors are becoming more cautious, with demand shifting from chasing upside to protecting against downside.
Some investors are looking for opportunities beyond Samsung Electronics and SK Hynix. Vikas Pershad, Portfolio Manager at M&G, said, "The alpha is further down the value chain—the 'pick-and-shovel sellers among pick-and-shovel sellers,'" referring to companies that benefit from AI infrastructure investment but are not the core trade targets.
Long-Term Bull Case Remains Intact
This shift toward caution does not signify a bearish turn on the South Korean market. Valuations remain cheaper—the Kospi trades at a forward 12-month price-to-earnings ratio of just 8.6x, below its five-year average of 10x—and investors still view South Korea as having one of the world's most compelling AI investment theses.
An earnings upgrade cycle is also broadening. Data from Golden Horse Fund shows that excluding Samsung Electronics and Samsung Hynix, earnings growth expectations for the remaining Kospi constituents have risen from 20% in January to over 50% for this year.
Rajeev De Mello, Global Macro Portfolio Manager at Gama Asset Management SA, commented, "The speed of this rally has been dizzying, but in this type of market, I'd rather let the rally run." He added, "If you exit now and the market doesn't correct, it will be very difficult to get back in later."
Many investors believe the long-term outlook for the tech hardware sector remains intact, supported by capital expenditure plans from hyperscale cloud providers and the strong earnings trajectory of South Korean chipmakers. Echoing Timothy Moe's view, Jung In Yun, CEO of Fibonacci Asset Management Global, also believes it is premature to call this the start of a long-term bear market. "After a strong run over the past few months, especially in AI and semiconductor-related stocks, a degree of correction is both healthy and expected," he said.
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