Global Market: AI boom turns turbulent as South Korea stocks slide into bear market

South Korea's benchmark KOSPI index has entered a bear market after an extraordinary AI-driven rally pushed it to record highs, underscoring the risks of a market dominated by semiconductor stocks and leveraged retail trading, according to Reuters.

The KOSPI has fallen about 25% from its record closing high of 9,114.55 reached in late June and was trading below the 7,000 mark on Tuesday, officially placing the benchmark in bear market territory. Despite the sharp correction, the index remains the world's best-performing major equity market this year, posting gains of around 60%, far ahead of the roughly 10% advance in MSCI's broad global equity index.

The dramatic reversal comes after a spectacular AI-led rally that propelled South Korean equities to unprecedented levels, driven primarily by strong earnings expectations for semiconductor giants Samsung Electronics and SK Hynix. President Lee Jae Myung, who had earlier set a target of 5,000 points for the KOSPI, has maintained that South Korean equities remain attractively valued despite the market's remarkable surge.


According to Reuters, while robust earnings growth at Samsung Electronics and SK Hynix continues to support the investment case, concerns have intensified over the market's heavy dependence on a handful of chipmakers, widespread use of margin financing and valuations that appear increasingly disconnected from the broader economy.

The sharp correction has highlighted the risks faced by retail investors who aggressively borrowed to participate in the rally. Margin-funded investments had surged during the market's ascent, magnifying both gains and subsequent losses as the selloff gathered pace.

Volatility has been particularly pronounced in SK Hynix shares. After tripling during the AI-fuelled rally and completing a record $26.5 billion U.S. listing by a foreign company, the stock fell 14% in Seoul on Monday. A twice-leveraged exchange-traded fund tracking the stock plunged more than 30% in Hong Kong, amplifying market declines and contributing to an 8% drop in the KOSPI during the session, Reuters said.

Samsung Electronics and SK Hynix together now account for just over half of the KOSPI's weighting, making the broader index highly sensitive to movements in the two semiconductor companies. This concentration has heightened concerns about market stability compared with other major equity markets where single companies represent a much smaller share of benchmark indices.

Reflecting the increased uncertainty, the KOSPI's volatility index stood at 82.07 on Tuesday after touching a record high of 97.99 on June 29, significantly higher than the 28.85 level recorded at the end of 2025, Reuters reported.

Regulators have also stepped up scrutiny. South Korea's Financial Supervisory Service said it would monitor leveraged investment products and investigate excessive marketing if necessary, while the Bank of Korea has indicated it is assessing whether single-stock exchange-traded funds could distort markets and increase volatility.

Foreign investors have withdrawn nearly $110 billion from South Korean equities so far this year, marking a record outflow as global funds sought to rebalance portfolios after the country's soaring market capitalisation. Reuters reported that the selling has left domestic retail investors as the primary buyers, with individuals purchasing 13.2 trillion won worth of KOSPI shares this month after buying 42.4 trillion won in June.

Retail investors also continue to maintain elevated levels of leverage. Borrowed investment in KOSPI shares stood at 28 trillion won on July 14, slightly below the record high of 29.8 trillion won recorded on June 24.

Despite the correction, earnings expectations for Samsung Electronics and SK Hynix have risen so rapidly that their forward price-to-earnings ratios have declined even as their share prices more than doubled this year. However, some veteran investors remain cautious, preferring to wait for valuations and market sentiment to cool before increasing exposure to South Korean equities.