After weeks of relentless gains that made it the world’s best-performing major stock index this year, South Korea’s Kospi stumbled on Wednesday amid renewed jitters over an artificial intelligence bubble, marking its steepest drop in three months.
The benchmark Kospi index plunged 2.9% to close at 4,004.42, after sinking as much as 6.2% intraday to trigger a sell-side circuit breaker, known as a sidecar, which suspends futures trading for five minutes to stop panic selling.
It marked the biggest one-day fall since Aug. 1, when investors were disappointed by the Korean government’s tax reform plan.
The Kosdaq index also lost 2.7% to 901.89, marking the first time since August 5, 2024 that both the Kospi and Kosdaq triggered sidecar halts on the same day.
FOREIGN INVESTORS TAKE PROFIT
Foreign investors unloaded about 2.5 trillion won ($1.7 billion) worth of Korean shares, sparking broad selloffs.
The pullback followed overnight weakness in US chip and AI stocks, with Palantir and AMD falling despite strong earnings, reigniting fears that the sector’s valuations have peaked.
Japan’s Nikkei 225 and Taiwan’s Taiex both dropped more than 1%, underscoring a broader retreat in Asia’s semiconductor-heavy markets.
“After the market zoomed about 20% last month alone, profit-taking was inevitable,” said Lee Han-young, head of equity investment at Vogo Fund Asset Management, calling the drop “a natural correction within an extended bull run.”
The Korean won weakened sharply, closing at 1,449.40 per US dollar, up 11.5 won from the previous day and briefly breaching 1,450 for the first time in seven months.
The currency’s slide was largely driven by heavy foreign outflows and broader dollar strength, traders said.
RETAILER INVESTORS BUY THE DIP
Retail investors stepped in aggressively to absorb foreign selling, buying a net 2.6 trillion won in Kospi stocks.
Their dip-buying centered on large-cap chipmakers SK Hynix Inc. and Samsung Electronics Co., along with Doosan Enerbility Co., LG CNS Co., Hanwha Solutions Corp. and Naver Corp.
Mom-and-pop investors have poured roughly 7 trillion won into domestic equities over the past three sessions, reversing months of caution.
Active retail accounts have surpassed 95 million, up 9% from the end of last year, while margin loan balance has climbed to 25 trillion won, nearing the record set in 2021, according to the Korea Financal Investment Association on Wednesday.
“Liquidity is ample,” said Na Jeong-hwan, analyst at NH Investment & Securities Co. “For now, individual investors will likely continue to underpin the market.”
SHORT-SELLING ACTIVITY ADDS TO CAUTION
Alongside the rally, short-selling positions have lately surged, amplifying volatility as more investors bet on a pullback.
As of end-October, short interest on the Kospi reached 12.46 trillion won, up 9% in a month, while that on the Kosdaq rose 14% to 5.3 trillion won.
Securities on loan, a proxy for future short trades, jumped 17% over the same period to 123.7 trillion won, reflecting heightened hedging activity after the Kospi’s surge from 3,400 in late September to above 4,100 by late October.
The most aggressive short-selling occurred in the country’s biotech and clean-energy stocks such as HLB Co., HLB Pharmaceutical Co. and LS Materials Ltd., which had soared 40-60% over the past month.
The Korea Exchange temporarily restricted short trades in some of those names after activity exceeded regulatory thresholds.
COOLING, NOT CRASHING
Despite the day’s turbulence, most analysts view the correction as healthy rather than structural.
With valuations stretched after a more than 60% surge in Korean equities this year and a weaker won prompting some profit-taking, the market appears to be recalibrating after an overheated run.
Still, few see the decline as the start of a lasting downturn. Ample liquidity conditions and upbeat earnings prospects for chipmakers suggest the broader trend remains intact.
“Today’s drop was largely driven by profit-taking after recent gains, compounded by the weakness in US tech stocks and warnings from Morgan Stanley and Goldman Sachs CEOs of a potential 10-15% correction,” said Lim Jeong-eun, analyst at KB Securities Co.
“But the Kospi remains in a clear bull-market zone, and with the 20-day moving average acting as a technical support level, the pullback is likely to be short-lived.”
