South Korea's share market is on track for its biggest daily rise on record, confounding officials' attempts to limit wild swings in equities and restrain mom-and-pop investors from taking on debt to buy stocks exposed to the global AI boom.
The benchmark Kospi index, dominated by the nation's largest chipmakers Samsung Electronics and SK Hynix, jumped over 17% on Friday in a dramatic reversal of a selloff over the previous three trading days. It means five of the 10 largest single-day moves in the Kospi's history have occurred since March, while three of the four biggest one-day declines happened in the past five weeks, according to LSEG data.
The Kospi's surge to end the week eclipsed a 12% daily gain in the midst of the global financial crisis in October 2008.
Friday's rally came after U.S. hyperscalers Amazon and Microsoft said overnight that they have lifted capital spending due to higher memory costs amid a global supply shortage, as surging AI demand continues to outpace production capacity. The announcements fanned new demand for the Korean chipmakers while easing concerns around the sustainability of massive AI infrastructure spending that had recently weighed on their stocks.
"The gamification of the stock market has led to such gyrations driven less by fundamentals but by news flows and fads," said Peter S. Kim, global strategist at KB Financial Group.
For policymakers, the volatility has become a major headache.
Regulators have imposed increasingly stringent restrictions on single-stock leveraged exchange-traded funds tracking the country's two leading chipmakers, which they say have amplified market swings since their launch in May. The products have attracted a surge of retail investors using margin financing. That propelled South Korean chip stocks to record highs earlier this year, but it coincided with a rapid exit of foreign institutional investors over the same period due to heightened risks, KB Financial Group data show.
The rapid boom-and-bust moves have led to the Korean market being dubbed the "Squid Game" market, a reference to the country's popular dystopian survival thriller series in which desperate characters resort to violence in a bid to win cash.
"The country has turned into a casino," opposition lawmaker Lee Jongwook said in a recent parliamentary hearing.
Regulators began taking action in mid-July, including the temporary suspension of single-stock leveraged ETF listings, introducing a higher minimum cash deposit requirement for investments and imposing a hard cap limiting individual investors' holdings of these leveraged funds to 20% of their total portfolios.
These efforts appear to have had little effect in calming markets, illustrated by this week's sharp swings.
"We expect market volatility to remain high," said BNP Paribas analyst William Bratton, putting South Korea at the heart of the debate over the sustainability of the AI-fueled tech super-cycle.
Some analysts believe the outlook for Korean chipmakers is strong as they get record orders and higher prices for their memory chips. This week, both Samsung Electronics and SK Hynix reported double-digit-fold increases in quarterly profit.
Josh Gilbert, APAC lead analyst at etoro, said the rebound in equities reflects investor confidence in the fundamentals of both companies.
"Investor anxiety seems to stem from this boom being driven by price rather than volume," he said. "But right now demand isn't slowing and the numbers speak for themselves."
According to BNP Paribas's Bratton, improving fundamentals will only increase the attractiveness of Korea's tech valuations.
With chip shortages likely into the medium term, KB Financial's Kim expects Samsung and SK Hynix to retain robust pricing power because of their technological edge, strong balance sheets and dominant market share. These are unlikely to be threatened by rising Chinese competition for the foreseeable future and means current sector volatility is more a mid-cycle correction than a signal that the AI boom has peaked, Kim said.
"In the end, fundamentals and earnings visibility make the current correction an opportunity for those who can withstand short-term volatility," he said.
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