Not long ago, South Korea’s stock market was one of the hottest in the world. Investors were pouring money into artificial intelligence (AI)-linked companies, stock prices were hitting record highs and optimism was everywhere.
Now, the mood has changed sharply.
The country’s benchmark after falling around 25% from its recent peak. Yet, despite this sharp correction, it remains the world’s best-performing major stock market this year, highlighting just how extraordinary its rally had been.
South Korea’s market had been on a remarkable run, driven mainly by excitement around AI and strong demand for advanced semiconductor chips.
The KOSPI climbed to an all-time closing high of 9,114.55 points before the rally lost momentum. Since late June, the index has dropped by about a quarter, officially placing it in bear market territory, reported Reuters.
Even after the recent decline, the index is still up roughly 60% this year, comfortably outperforming many global markets.
Much of the market’s rise was fuelled by two companies— Electronics and SK Hynix.
Both chipmakers have benefited from booming demand for AI-related semiconductors, leading to strong earnings expectations and attracting investors from around the world.
However, the rally became increasingly dependent on these two stocks. Together, Samsung Electronics and SK Hynix now account for more than half of the KOSPI’s total market value, meaning any sharp movement in either company has a significant impact on the entire index.
Experts say several factors have contributed to the sudden correction.
Many retail investors borrowed money through margin trading to invest in shares during the rally. As prices started falling, these leveraged positions amplified the losses, triggering more selling and increasing market volatility.
SK Hynix became one of the biggest examples of this trend. After its spectacular rise, the stock witnessed some of its sharpest daily declines, with leveraged investment products linked to the company also suffering steep losses, mentioned the report.
Analysts say such heavy dependence on a few stocks has made the South Korean market more vulnerable to sudden swings.
The recent volatility has also caught the attention of South Korean regulators.
The Financial Supervisory Service has said it will closely monitor leveraged investment products and investigate aggressive marketing practices if required.
Meanwhile, the Bank of Korea is examining whether single-stock exchange-traded funds (ETFs) could be increasing market instability by encouraging excessive risk-taking.
Another reason behind the recent weakness is the sharp selling by overseas investors.
Foreign investors have pulled out nearly $110 billion from South Korean equities this year. Market experts say many global funds reduced their exposure after the country’s market value rose rapidly and became a much larger part of their investment portfolios.
As foreign investors sold shares, domestic retail investors stepped in to buy, with many continuing to invest despite rising market volatility.
Interestingly, analysts point out that many semiconductor companies still appear reasonably valued.
Although share prices have risen sharply over the past year, earnings forecasts have improved even faster. As a result, forward price-to-earnings (P/E) ratios have actually fallen for some leading chipmakers.
This suggests that the recent rally has not been driven solely by speculation but has also been supported by stronger profit expectations.
The sharp correction has split opinion among market experts.
Some believe the recent fall offers a buying opportunity, arguing that the long-term outlook for AI and semiconductor companies remains strong.
Others are urging caution, saying the market had risen too quickly and that high levels of borrowing have increased the risk of further volatility.
For investors, South Korea’s market is now a reminder that even the strongest rallies can reverse quickly—and that rapid gains often come with equally sharp risks.