South Korea’s stock market extended its steep selloff for a second consecutive session on Wednesday as investors continued to unwind heavily leveraged bets on artificial intelligence-linked semiconductor stocks, overshadowing strong earnings from chipmaker SK Hynix and raising concerns about the sustainability of one of the world’s biggest AI-driven market rallies.
The benchmark KOSPI index closed down about 6%, following an almost 11% plunge on Tuesday, leaving the market down nearly 35% over the past month as retail investors rushed to reduce exposure to highly leveraged positions.
The latest decline came even after SK Hynix reported solid quarterly results, highlighting that investor sentiment has shifted away from company fundamentals toward concerns over valuation, leverage and the enormous capital spending required to sustain the global AI boom.
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Analysts broadly agreed that the selloff has been driven less by deteriorating corporate earnings than by the rapid unwinding of leveraged trades that had propelled South Korean technology stocks to record highs earlier this year.
“The selloff is not driven by fundamental deterioration. This is a liquidity and sentiment-driven event, fueled by the forced unwinding of single-stock leveraged ETFs across Korea, U.S., HK and UK, making the move sharper and more extreme than warranted by fundamentals,” said Peter Kim, senior managing director at KB Securities in Seoul.
He said retail investor positioning and fund flows, rather than earnings, have become the dominant force in the market.
“Sentiment remains fragile and retail-dominated, with fund flows and retail positioning currently the key market driver rather than earnings or fundamentals,” he added. “The scale of leverage built up means the flush out will not complete within one or two weeks, and the price correction itself is generating more negative headlines, creating a self-reinforcing cycle that continues to overshadow any positives.”
The correction marks a dramatic reversal for South Korea’s equity market, which had been among the world’s strongest performers during the AI-driven rally. Much of the buying had centered on memory chip manufacturers SK Hynix and Samsung Electronics, whose shares surged on expectations of sustained demand for high-bandwidth memory chips used in AI servers.
However, those same stocks have become the epicenter of the current selloff as investors reassess whether AI-related earnings growth can justify lofty valuations.
“SK Hynix delivered strong results, but in today’s AI market, strong is no longer enough,” said Gary Tan, portfolio manager at Allspring Global Investments.
“Investors were looking for additional catalysts, particularly around long-term agreements and shareholder returns, to support a memory sector that has become the epicenter of the AI trade. Without those signals, we expect volatility in AI-linked equities across Asia to persist as leveraged positions unwind and the market resets expectations.”
Questions Around AI Infrastructure Spending
Adding to investor concerns are questions surrounding the long-term economics of AI infrastructure spending.
Large cloud service providers have committed hundreds of billions of dollars to expanding AI data centers, but investors have increasingly questioned whether the pace of capital expenditure can be sustained given rising debt levels and pressure on free cash flow.
At the same time, recent advances in China’s semiconductor industry have introduced fresh competitive risks for established chipmakers.
Gina Kim, portfolio manager for emerging market equities at Nordea Asset Management, said the market reaction has become increasingly disconnected from company fundamentals.
“Given that the fundamental thesis remains intact, there does appear to be an irrational, panic-like element to the current selling, which has been concentrated in AI-related tech names.”
She added that while some selling reflects legitimate concerns about AI spending, margin calls, seasonal de-risking and China’s technological advances, her firm has only reduced technology exposure because of portfolio concentration limits rather than weakening business fundamentals.
Several strategists said the widespread use of leveraged exchange-traded funds amplified the market decline.
“It’s certainly a very crowded trade which is being unwound,” said Frank Benzimra, head of Asia equity strategy at Societe Generale.
“If you look at what is falling in the market, it has been the stocks in which you have the most leverage, and especially you have this single-stock leveraged ETFs, which had exploded during the months of May and June.”
“It’s very difficult to say when will this selloff end, but at the moment, it’s definitely not the trade where we want to be.”
Korea’s Finance Minister Apologized
The turmoil has drawn increasing attention from South Korean policymakers.
Finance Minister Koo Yun-cheol apologized in parliament on Wednesday after lawmakers criticized the government’s handling of leveraged investment products that contributed to heavy retail investor losses.
The controversy centers on the introduction of single-stock leveraged exchange-traded funds on May 27.
According to KB Financial Group, South Korean retail investors have purchased about 14 trillion won ($9.7 billion) worth of the products, compared with roughly 2 trillion won purchased by foreign investors.
Those investments have suffered severe losses during the recent correction.
The KODEX SK Hynix Single Stock Leverage ETF, designed to deliver twice the daily movement in SK Hynix shares, has fallen more than 80% since reaching its peak on June 23.
The equivalent leveraged ETF linked to Samsung Electronics has declined nearly 75% since its June 3 high.
The scale of those losses has prompted regulators to consider tightening access to the products.
Lee Eog-weon said the Financial Services Commission is considering restricting single-stock leveraged ETFs to professional investors.
“If necessary, there is a way to raise [the investment requirements] up to professional investors,” Lee told lawmakers.
He also said regulators are examining whether to reduce the leverage embedded in the products.
“Since [the tracking multiple of] two times is too large, lowering it would likely have an effect in terms of easing volatility,” Lee said.
He added that authorities would consider investor protections, including consultations with fund holders, if lawmakers move forward with legislative changes.
Some market participants believe the correction still has further to run.
“We won’t say market is in a panic mode, more like a rotation into other sectors which has been largely out of sight for a while,” said Wee Khoon Chong, Asia-Pacific macro strategist at BNY.
“Today’s price action suggests that the leverage within Korean equity remains high and further unwind could be expected.”
Others argue the market is approaching the end of the deleveraging cycle.
“The market gave a warning in June already, but no one listened,” said Pierre Hoebrechts, deputy chief investment officer at East Eagle Asset Management.
“Very much a technical sell off. The amount of money that went into SK and Samsung was staggering. The number of accounts opened in Korea combined with the local leverage and very concentrated exposure, with the cherry on the cake being large 2x levered foreign ETF just made it an accident waiting to happen.”
“The selloff will stop once most of the margin accounts have been wiped out, which should be not far from here.”
While most analysts continue to view the long-term outlook for AI demand and semiconductor earnings as positive, they say the recent correction reflects a broader repricing of risk as investors reassess leverage, valuations and the sustainability of the AI investment cycle.