South Korean Stock Market Loses Investor Appeal After AI Boom Cools

South Korea's $4.3 trillion stock market is losing relevance with investors as a major reversal hits the country's AI trade. Turnover has dropped 70% from its peak in late May, while foreign funds pulled $131 billion from Korean stocks this year, marking the fastest retreat in Asia. The Kospi benchmark led global equities in the first half of the year but has since fallen 22% in the second half.

Market Challenges

The market's fortunes rely heavily on Samsung Electronics and SK Hynix, two memory-chip giants that make up over half of the Kospi's weighting. This high concentration has become a liability as investors question how long the memory chip boom will last. Phillip Wool, head of portfolio management at Rayliant Global Advisors, notes that the easy money in that theme has already been made, prompting his fund to underweight both companies. Skepticism over demand was clear when Samsung shares fell on Thursday despite a nearly nine-fold jump in quarterly operating profit.

Investor Retreat

Foreign capital is heading back toward US equities, according to Richard Tang, head of research for Hong Kong at Julius Baer. Individual local investors, who drove a massive rally in the first half, are also staying away following a brutal leverage-driven selloff in the summer. Margin loans sit around 33 trillion won after peaking at 38.6 trillion won in June, and brokerage account deposits have dropped from near 140 trillion won to about 100 trillion won. A series of combined 55 trillion won stock buybacks by Samsung and SK Hynix, which drove most of the $23 billion in buy orders last month, is now nearing completion.

Regional Rivalry

Many investors are shifting focus to Taiwan's Taiex Index, which is up 70% this year and beat the Kospi by 23 percentage points last quarter. Chun-Lai Wu, head of Asia Asset Allocation at UBS Global Wealth Management, states that Taiwan offers a more complete technology hardware ecosystem and robust spending plans from major tech firms. Still, some investors see value in Korean stocks due to lower valuations, strong memory chip profitability, and an ongoing corporate value push.

Context

Stock markets often experience sharp sector rotations when a dominant investment theme like artificial intelligence matures and investors reassess risks. Heavy reliance on just a few massive companies can expose a national index to rapid downturns when sentiment shifts away from those specific industries. Regional competition between Asian tech hubs like South Korea and Taiwan regularly influences how global investment funds distribute their capital across emerging markets.