South Korea's benchmark KOSPI plunged 12% on March 4, recording its steepest one-day decline since the global financial crisis. Market participants point to a forced unwinding of heavily leveraged long positions and accelerated selling by foreign investors as the immediate drivers behind the collapse.
That 12% fall marks the worst daily drop since 2008 and comes amid an overall deterioration in investor sentiment after the recent escalation of conflict in the Middle East. Since the outbreak of the conflict, the KOSPI has been the weakest performer among major equity indices worldwide, slipping roughly 15% from its pre-conflict levels.
Bank of America highlighted the role of excessive leverage as a key amplifier of the sell-off. In the note, BofA strategist Chun Him Cheung said: "The sharp decline reflects the outsized leverage in long positions heading into February 28, 2026, when market sentiment was highly bullish on Korean tech due to the aggressive shortage of memory chips used in AI server production."
Cheung added that the unwind of those long KOSPI positions triggered a broader reduction in leverage across the Korean equity market: "The rapid liquidation of long KOSPI positions has flushed out excessive positioning, leading to a broad unwinding of leverage in the Korean equity market."
Foreign selling and margin exits
Foreign investors have been particularly active sellers during the most recent phase of weakness. Data cited in the BofA note indicate that since Feb. 28 foreigners have been margin sellers of KOSPI positions, a dynamic that has accelerated downward pressure on the index.
The selloff did not remain confined to equities. Currency markets also moved sharply as the Korean won slid in tandem with stocks. USD/KRW climbed from a recent low near 1,430 to above 1,500 during offshore trading hours before what market observers describe as suspected smoothing operations brought the pair back below 1,470.
Cheung warned that this currency volatility could persist while geopolitical tensions remain unresolved. He outlined two scenarios: if the spillover from the Middle East conflict into the broader dollar rally is limited, he expects USD/KRW to remain capped below 1,480; "However, if risk‑off sentiment drives a broader USD rally, USDKRW could retest the 1,500 level again," he said.
Trade balance and semiconductor demand
Despite the market shock, Cheung emphasized that Korea's trade position entered the geopolitical escalation in comparatively strong shape. Semiconductor demand underpinned export strength, with February exports rising 29% year-over-year. The surge was attributed entirely to strong global demand for Korean memory chips, a trend economists cited in the note expect to continue in the coming months.
Nonetheless, the strategist noted the potential for the Middle East conflict to erode the trade position via higher oil costs. While the export cycle for semiconductors remains supportive, rising energy prices represent an offsetting factor that could weigh on trade dynamics if sustained.
Positioning and near-term outlook
One additional dynamic the note highlighted is that overseas equity outflows from Korean retail investors have now stabilized. Given that, Cheung suggested that once financial market volatility begins to subside, positioning in both equities and foreign exchange markets may start to shift. That shift could leave USD/KRW vulnerable to downside pressure, although he framed that as contingent on an easing of broader market stress.
In summary, the March 4 plunge reflected a combination of concentrated leverage in bullish positions, accelerated foreign margin selling since Feb. 28, and spillovers from heightened geopolitical risk. Currency moves and the interplay between semiconductor-driven export strength and potential oil-price headwinds are central factors to monitor as markets digest the shock.