Kospi Index crash: Why South Korean market fell alongside AI stocks

The market hit the brakes

South Korea’s stock market dropped sharply on Monday immediately after the opening bell. In the first minutes of trading, the Kospi Index fell nearly 9%, forcing the exchange to halt trading for 20 minutes in order to contain panic selling, the BBC reported.

The main blow fell on the country’s largest technology companies. Samsung Electronics shares were down about 5% at one point, while SK Hynix fell about 2%. These two companies make up a huge share of the index: together, they account for more than 40% of the Kospi. That is why a drop in Samsung and SK Hynix quickly turns into a decline for the entire market.

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Until then, South Korean stocks had been one of the most promising investment destinations. The Kospi was considered one of the strongest markets in the world thanks to demand for companies linked to AI and memory chip production. But after a record rally, the market became highly sensitive to any bad news: when investors started exiting technology stocks, South Korea took one of the hardest hits.

Chip overheating

The main reason for the sell-off was the fear that shares of companies linked to AI had risen too quickly. In recent months, investors had been actively buying shares of chipmakers and companies producing server equipment and memory, expecting huge demand from AI companies. Against this backdrop, Samsung Electronics and SK Hynix became two of the main beneficiaries of the rally.

But at some point, the market began to question whether real financial results justified such growth. Another blow came from weak results at Broadcom: the company missed revenue expectations for its fiscal second quarter, after which its shares fell and dragged down the entire semiconductor sector. On Friday, the VanEck Semiconductor ETF, which tracks chipmaker stocks, lost more than 9%, Arm Holdings fell almost 13%, and Micron Technology dropped more than 13%.

Against this backdrop, pressure quickly spread beyond the U.S. and South Korea. In Taiwan, TSMC shares fell by around 2%, while Foxconn dropped more than 5%. In Japan, SoftBank Group fell by about 7.5%, Tokyo Electron lost around 6.7%, and Advantest declined by about 5%. As a result, investors were selling not only South Korean stocks, but the entire Asian chain of companies linked to chips and AI.

Selling the winners

But the problem was not only fear of overheating in the AI sector. Another mechanism kicked in on the market: large investors started selling the stocks that had previously performed best. This does not mean they had become disappointed in Samsung, SK Hynix, TSMC or other chipmakers. Often, funds are simply required to cut positions if one company or one sector takes up too large a share of the portfolio.

After the strong rally, this problem became especially visible. For example, Jupiter Asset Management manager Sam Konrad said his fund had been forced to sell TSMC, Samsung and MediaTek, even though those stocks had risen 52%, 159% and 184% year to date, respectively. For a fund, such growth looks positive, but it also creates risk: the portfolio becomes too dependent on a handful of winners.

A similar picture can be seen among foreign investors in South Korea. Net foreign outflows from the Kospi market had reached roughly $62 billion by the end of May. At the same time, part of this selling is linked not to a deterioration in South Korean companies’ businesses, but to ordinary portfolio rebalancing after an overly strong rally.

Additional pressure came from retail investors and leveraged ETFs — funds that use borrowed money to bet on the growth of individual stocks or sectors. When the market goes up, such instruments amplify the move. But when it falls, they can work in the opposite direction and make the sell-off sharper.

A test of strength

After the crash, some analysts did not describe it as the beginning of a prolonged downturn. Goldman Sachs believes the long-term story for the South Korean market remains strong and even raised its Kospi target to 12,000 points. Some investors also describe what is happening not as a trend reversal, but as a sharp correction after an overly rapid rally.

But the market will now look more closely at AI companies. Previously, investors were satisfied with belief in future demand for chips, servers and memory. Now they need more concrete proof: growth in revenue, profit, orders and real contracts. If companies cannot show such numbers, the stocks that rose the most on the AI theme may come under pressure again.

The Kospi crash became a warning for the entire market: if growth depends on a few companies and overly high expectations, even a strong trend can quickly turn into a sell-off. AI remains a major investment story, but investors are no longer ready to buy it at any price. Now they need not only promises of future growth, but real financial results.

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