Global Market: Citi downgrades South Korea to neutral as AI chip volatility mounts

South Korea's stock market has lost its top spot in global investors' tactical playbooks, with Citigroup downgrading the country to a neutral stance after keeping it overweight for the past year, citing heightened volatility in AI-linked chip stocks, according to Reuters.

The move comes after a sharp swing in sentiment toward semiconductor stocks, which had powered South Korea's benchmark KOSPI index to become one of the world's best-performing equity markets this year. However, recent weeks have seen heavy volatility driven by retail enthusiasm for leveraged single-stock exchange-traded funds (ETFs) and growing concerns over stretched valuations, Reuters reported.

AI optimism remains, but exposure trimmed

Despite the downgrade, Citi said it remains structurally positive on the long-term artificial intelligence investment theme. According to Reuters, the bank has opted to reduce its tactical exposure to South Korea while keeping an overweight position on Taiwan and upgrading China to overweight in its emerging markets allocation.

The brokerage also noted that conversations with clients are increasingly focused on the possibility of broader market leadership emerging in the second half of 2026. Even so, Citi remains cautious about making a wholesale shift away from technology stocks, Reuters said.

Rotation gathers pace across emerging markets

The changing market leadership has also been highlighted by Yardeni Research, which downgraded emerging markets to a market-weight recommendation. Reuters reported that the firm cited rising oil prices, a stronger U.S. dollar supported by the Federal Reserve's hawkish stance, and signs of AI-related fatigue in South Korea and Taiwan as reasons for the downgrade.


According to Yardeni, market leadership has rotated significantly in July, with South Korea and Taiwan—two of the strongest-performing markets earlier this year—now emerging as the weakest performers during the month.

Sharp monthly losses after stellar gains

South Korean equities have fallen about 23% so far in July, although they remain up roughly 55% for the year. Taiwan's stock market has declined around 8% during the month but continues to show gains of approximately 47% in 2026, according to Reuters.

The sharp pullback reflects investors' reassessment of AI-driven valuations after months of strong gains, even as the longer-term outlook for the sector remains broadly constructive.

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