South Korea's stock market has slipped into a technical bear market, with investors expressing apprehension about the long-term prospects of the AI chipmakers that have been driving the global rally.
The benchmark Kospi index fell more than 5% on Wednesday and has now declined over 20% from its record high set in June.
A drop of more than 20% from a recent peak defines a technical bear market, although the Kospi index remains up more than 70% year-to-date in local currency terms, ranking it as the world's best-performing major equity index.
On Wednesday, the market's two largest constituents, Samsung Electronics and SK Hynix, fell 6.3% and 5.7% respectively. Both stocks had previously soared on demand for memory chips, which are crucial for the data centers that power AI applications.
However, market sentiment has begun to shift. Samsung shares plunged as much as 10% at one point on Tuesday, even as the company forecast a record operating profit for a third consecutive quarter.
Analysts attributed the decline to a lack of clarity on how Korean chipmakers will execute long-term chip supply agreements with their customers.
While U.S. rivals like Micron Technology have shifted their business models to include longer-term supply deals, it remains unclear whether Samsung and SK Hynix can secure similar contracts.
"We haven't formally heard from the Korean peers yet on how they plan to execute these long-term agreements," said a strategist.
The strategist noted that the price-to-earnings ratios of Korean chipmakers "could go up if they can shift to long-term contracts."
"Given how strong the fundamentals have been in the Korean market over the past two years, it's challenging to call it a bear market," they added.
Volatility in the Korean market has been amplified by the popularity of leveraged exchange-traded funds (ETFs), which magnify price movements.
On Tuesday, the head of South Korea's financial regulator warned of "excessive" leveraged stock investments by retail investors.
Some fund managers welcomed the pullback, calling it an inevitable correction.
"This is a necessary adjustment because the previous rally was too steep and fast. There could be buying opportunities beyond AI," said Chan Lee of Petra Capital Management.
"I don't think the story is over. This is just a correction in an uptrend. Nothing goes up forever," said Jongmin Shim, a Korea equity strategist.
This market adjustment comes just days after SK Hynix announced plans for a landmark U.S. exchange listing, aiming to raise up to $29 billion, which is expected to be the largest share sale by an Asian company on record.
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