SINGAPORE, July 29 - South Korea’s equity market suffered a sharp retreat for a second day on Wednesday as a rally centered on artificial intelligence-related names gave way to one of the steepest selloffs in recent weeks. The benchmark KOSPI index fell roughly 7% and traded at its lowest level since early April after chipmaker SK Hynix posted very strong results that nevertheless fell short of the market’s elevated expectations.
The price action has prompted a range of assessments from portfolio managers, strategists and market analysts, who point to concentrated positioning in AI-linked memory stocks, elevated leverage among investors and a wave of profit-taking by foreign holders as key factors amplifying the move.
Market reactions and investor positioning
Gary Tan, portfolio manager at Allspring Global Investments in Singapore, said SK Hynix’s numbers were solid but inadequate to satisfy a market that has come to demand extra catalysts in the AI environment. He noted that investors were seeking signs of long-term contracts or clearer shareholder-return programs to underpin valuations in the memory sector, which has become central to the AI trade. In his view, without those signals, volatility in AI-linked equities across Asia is likely to remain as leveraged positions unwind and market expectations are recalibrated.
"SK Hynix delivered strong results, but in today’s AI market, strong is no longer enough. Investors were looking for additional catalysts, particularly around long-term agreements and shareholder returns, to support a memory sector that has become the epicentre 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."
Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong, described the situation as a crowded trade that is being unwound. He highlighted that those stocks carrying the most leverage have borne the brunt of the declines, and he singled out single-stock leveraged ETFs as having ballooned in May and June and then peaked at the end of June. Since that peak, Benzimra said, deleveraging has been evident.
"It’s certainly a very crowded trade which is being unwound. 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, and you have the top which had been reached at the end of June, and since that time you are seeing some deleveraging at work.
"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."
Leverage, margin accounts and technical pressures
Several market commentators stressed technical factors and concentrated exposure as central to the rout. Pierre Hoebrechts, deputy chief investment officer at East Eagle Asset Management in Hong Kong, called the move largely technical and warned that the combination of massive inflows into a handful of names, local leverage and a proliferation of 2x leveraged foreign ETFs created an environment primed for a sharp reversal.
"The market gave a warning in June already, but no one listened. 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."
WEE Khoon Chong, APAC macro strategist at BNY in Hong Kong, pointed to persistent volatility in Korea and said Wednesday’s moves suggest a still-elevated level of leverage in Korean equities and the prospect of further unwind. He described the price action as more of a rotation into sectors that had been overlooked, with selling pressure concentrated in information technology while demand persisted across other parts of the market, according to BNY’s custodian data.
Foreign flows, participation and trading dynamics
Fabien Yip, a market analyst at IG in Sydney, observed that foreign investors had taken profits earlier in the month, which contributed to selling pressure on both the KOSPI and the Korean won. She added that as volatility increases, market participation declines, which can magnify price moves because lower volume allows prices to swing more sharply. Yip noted that many of the participants she deals with are short-term traders who have been active amid the volatility and that tech names have attracted significant attention over recent weeks.
"What we saw earlier in the month was that the foreign investors, a lot of them have taken profit, and that’s why we’ve seen a lot of selling pressure on the KOSPI as well as on the Korean won. While that has kind of tapered off in the past few days, it looks like the number of market participants in the market, because it’s so volatile, has kind of tapered off, so there are less people participating in the volatility. And given the volume is lower, it could potentially also drive prices wilder.
"In general, the clients that we are dealing with have been participating in the volatility, because a lot of these are shorter-term traders, so having that volatility in place is actually quite beneficial ... definitely seeing a lot of interest around tech names in the past few weeks."
Regional comparisons and outlook
Shingo Ide, chief equity strategist at NLI Research Institute in Tokyo, suggested there was no single fresh event that turned sentiment negative but rather an extension of an existing trend. He contrasted the KOSPI’s correction with Japanese equities, which he said may not have fully finished adjusting but had fallen to levels where the correction could be nearer completion. For the KOSPI, he allowed that more downward adjustment could be possible, adding that the movement felt more like a correction in an overheated market than the direct impact of isolated operational disruptions in Japan.
"There was no fresh event that soured sentiment; the market is simply extending its recent trend. Japanese stocks may not have fully completed their correction, but they had fallen to levels where the adjustment could have run its course. For markets such as the KOSPI, the correction may still have further to go.
"Regarding Japanese equities, (halt in operations at some companies due to the earthquake), has been reflected. That said, rather than the impact of the earthquake, it feels more like a correction in a market that had become overheated - that factor seems stronger."
Market data and immediate consequences
In intraday trading, the KOSPI’s steep decline coincided with sizable drops in major tech-related names, including double-digit pressure on heavily weighted memory and semiconductor stocks. The episode has drawn attention to the interplay of concentrated flows, leveraged products and reduced market participation, which together have produced outsized moves in a narrow set of AI-exposed equities.
Summary
The selloff in South Korean shares reflects a mix of disappointed expectations around high-profile earnings, significant leverage concentrated in a few large tech names, profit-taking by foreign investors and lower participation that amplifies price swings. Analysts warn that the unwind of leveraged positions and the clearing of margin accounts could prolong volatility, particularly for the information technology sector and AI-linked memory stocks, until the technical adjustments run their course.