Korea's KOSPI slides and then recovers as cracks emerge in world-beating rally

South Korea’s $4.9 trillion stock market is starting to flash signs of strain after a world-beating rally.

The Kospi tumbled as much as 7% Friday as Samsung Electronics Co. and SK Hynix Inc. sank — outsized moves that show how volatile the market has become. The exchange briefly halted program selling as futures slumped, a pause that has become more common this year.

It should be noted that the KOSPI has recovered from the deep lows and is now trading with cuts of around 3%.

The benchmark index surged more than 100% this year through Thursday but gains have been concentrated in the two chip heavyweights, making the market vulnerable to a sudden waning of momentum in the AI trade. Retail participation is also losing some steam, while surging margin loans face the risk of a Bank of Korea rate hike. The rise of leveraged exchange-traded funds may further intensify a reversal, analysts say.

“Valuations in parts of the AI ecosystem have become stretched,” said Jung In Yun, chief executive officer at Fibonacci Asset Management Global. “Near-term volatility is likely to remain elevated, though we do not view this as a change in the broader trend.”

Market breadth is the central worry. Samsung Electronics and SK Hynix, enjoying AI-driven chip demand, account for 54% of the Kospi’s market weight and roughly half of the gauge’s average daily turnover in May, according to Korea Exchange data. Nearly three-quarters of its gains this year have come from the two firms.

Single‑stock leveraged ETFs tied to Samsung and SK Hynix are adding to concerns. The four most popular single-stock ETFs accounted for 21% of the total ETF turnover in South Korea in their first five sessions after launching May 27, exchange data show.

“The current market structure is vulnerable to a downturn as it’s dominated by the short gamma in the leveraged ETFs,” said Kenny Kim, chief executive officer at Meridian One Asset Management. “The setup requires investors to chase rallies with heavy buying when the market rises, but forces them to dump shares when the market falls.”

Fading Interest

Foreigners have been on a selling spree, offloading 15.8 trillion won ($10.2 billion) worth of Kospi shares in June alone, due a combination of profit taking and portfolio adjustments due to single-stock caps.

Retail investors, once key drivers, are showing less willingness to commit fresh cash. Brokerage deposits fell to 121 trillion won ($79 billion) by May 22 from 137 trillion won on May 12, according to the Korea Financial Investment Association.

Meanwhile, margin balance hit a record 38 trillion won on May 29, up from 27.3 trillion won at the end of 2025, KFIA data show.

Rising margin loans alone may indicate heightened interest. But the increase, while investor deposits fall, may point to more leverage stress without fresh appetite to take on risk, according to Shawn Oh, an equity sales trader at NH Investment & Securities. “The signal is clear: the cash buffer eroding while active leverage refuses to unwind,” he added.

Still, optimism dominates in Korea. Appetite for AI-related stocks remains strong, and Wall Street banks remain upbeat on chip earnings.

Just this week, Goldman Sachs Group Inc. raised its Kospi target to 12,000 from 9,000. “The market breadth is indeed narrow, but that will not necessarily stop the benchmark from hitting 10,000,” said Jonathan Pines, head of Asia ex-Japan equities at Federated Hermes.

Another test looms next month, when the central bank is widely expected to raise interest rates. That could dampen liquidity, said Seo Sang-Young, a strategist at Mirae Asset Securities.

“The market is sensitive to bond yields because investments are driven by borrowed money,” Seo said.

 

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