Kospi stock market recovery: How South Korea’s benchmark surged after plunging 22% in July

This is a sharp reversal from July, when the index plunged 22%, its worst monthly decline since the 2008 global financial crisis. Despite the recovery, the Kospi remains roughly 24% below its late-June peak. Even so, it is still up more than 60% for the year.

Much of the latest rally is concentrated in South Korea’s semiconductor giants. Samsung Electronics gained nearly 5% on Thursday, while SK Hynix surged 9.8%. Their performance has once again put Korean technology stocks at the centre of investor attention.

The bigger question now is what exactly is behind the rebound. Is this simply a recovery after an exaggerated sell-off, or is it telling that investors are becoming more confident about the earnings outlook for Korea’s chip industry?

The July sell-off may have been more technical than fundamental

The scale of July’s decline suggested that something had gone seriously wrong with the Korean market. However, analysts at Macquarie Capital argue that the sell-off was driven largely by positioning, fund flows and forced selling rather than a dramatic change in corporate fundamentals.

Foreign and institutional selling has eased since the end of July, while margin financing remains at manageable levels, according to the bank’s analysts.

“The volatility is over,” they wrote. The concentration of the July losses also tells an important part of the story. Samsung Electronics and SK Hynix alone were responsible for 71% of the Kospi’s decline during the month. The two stocks fell 48% together, compared with a decline of less than 10% across the rest of the market.

That concentration is now working in the opposite direction. With the two chipmakers recovering, the index has received a significant boost.

Macquarie expects both companies to remain among the main drivers of the near-term recovery, particularly as demand for memory chips used in AI infrastructure continues to expand.

“We are facing the worst memory crunch in history and see no signs of supply constraints easing within the next three years,” Macquarie said in a statement reviewed by Business Insider.

AI remains the key support for Korean chipmakers

One of the biggest reasons investors have become more comfortable buying technology stocks again is that the global AI spending story has not weakened as sharply as feared.

Recent results from US technology companies have pointed to continued investment in AI infrastructure. That matters for South Korea because Samsung and SK Hynix are major suppliers of the memory chips required by data centres and AI systems.

“The AI spending boom is far from over,” David Morrison, senior market analyst at Trade Nation, told CNBC.

Better-than-expected results from companies such as Supermicro and cloud provider CoreWeave have further strengthened expectations that the AI investment cycle still has momentum.

This has also changed the relative performance within technology stocks. Memory companies, which were among the biggest casualties of the recent sell-off, have started outperforming the wider technology sector again.

“Because of AI agents and physical AI, memory demand has exploded, but we entered into this with a quite limited supply capacity – that’s where the bottleneck is,” Qian Zhang, emerging markets equities investment specialist at Baillie Gifford, was quoted as saying by Bloomberg.

“We’re not saying the world will be building data centers forever at this speed, but that is a real physical bottleneck that only a few companies in this world can resolve,” Zhang added.

A technical rebound is gaining fundamental support

There are signs that the recovery is more than a simple bounce after a crash. The iShares MSCI South Korea ETF has moved above an important technical level following gains in Samsung Electronics and SK Hynix. Fundstrat Global Advisors’ Mark Newton believes the move has created a more favourable technical setup for Korean equities.

The ETF’s latest move confirmed a reversal pattern that Newton said CNBC “looks attractive technically for further near-term gains.”

The return of strength in memory stocks is particularly important. These companies had been among the hardest hit during the technology sell-off, but their recent outperformance suggests investors may be starting to rebuild exposure to the sector.

Newton described that as “a good sign in the short run for Memory within Technology,” adding that the group appears to be one of the last major corners of tech to begin turning higher.

Samsung and SK Hynix are so influential within the Kospi that their direction can have a major impact on the entire index.

The rebound still depends heavily on AI

The same concentration that has helped the Kospi recover also creates a vulnerability. South Korea’s market is increasingly tied to the global AI hardware cycle. Any indication that major technology companies are preparing to reduce infrastructure spending could therefore have an immediate impact on Korean equities.

“Korea’s equity market is basically synonymous with the AI hardware trade at this point,” said Phillip Wool, head of research at Rayliant Global Advisors told CNBC.

Wool believes the latest rally has both technical and fundamental elements. Forced selling has eased, investors who had been waiting on the sidelines have returned, and fear of missing out has added to the momentum. At the same time, stronger Big Tech earnings have improved expectations for AI infrastructure spending and Korean semiconductor earnings. However that optimism could reverse quickly if the underlying AI narrative weakens.

“Anything that calls this narrative into question, whether it’s soft guidance on capex from hyperscalers, sagging token pricing, Fed tightening fears, we can expect to see a pullback,” Wool said. “Expect continued volatility as long as there’s uncertainty about how AI hardware spending will play out.”

US Treasury yields and the dollar are another potential source of pressure. Fundstrat’s Newton expects the market to remain constructive in the near term, but believes a renewed rise in either could eventually weaken the rally.

Korea’s valuation gap is another part of the story

The recovery is also unfolding against a longer-term effort by South Korea to make its equity market more attractive.

The government’s corporate-governance reforms and “Value-Up” programme are aimed at addressing what investors have long referred to as the “Korea discount,” the tendency for South Korean companies to trade at lower valuations than comparable businesses elsewhere.

Billy Leung, investment strategist at Global X ETFs, said these reforms have helped narrow that discount.

“The KOSPI is in a bull market, but the more important question is whether the rally is being driven by speculation or by a genuine improvement in fundamentals,” Leung told CNBC.

Why investors should not expect another straight-line rally

Some analysts are reluctant to call this the start of an entirely new bull market.

“I would be cautious about describing this as a completely new bull market,” said Jung In Yun of Fibonacci Asset Management Global told Bloomberg.

He sees the rebound as a combination of two things: the market recovering from forced selling and a return of stability. His expectation is that the longer-term bullish trend can continue, supported by semiconductor earnings and improving investor sentiment, but that the pace is likely to moderate.

“After such a steep rebound, some consolidation would be healthy, and investors should not expect the market to rise at the same pace from here.” The Kospi has gone from a severe technology-led decline to a rapid recovery in a matter of weeks. A period of consolidation would therefore not necessarily undermine the recovery story.

What comes next for the Kospi?

The latest gains suggest that July’s collapse may have had less to do with a breakdown in the AI and semiconductor investment story and more to do with the unwinding of crowded and leveraged positions.

“The AI rally and continued strong earnings have been a constant during the sell-off, so it is fundamentals returning the market back to normalcy rather than the other way around,” said Peter Kim, head of global investment strategy at KB Securities to CNBC.

Kim said valuations and earnings remained relatively intact during the semiconductor sell-off, while technical factors, fund flows and deleveraging amplified the decline.

The market may therefore have fallen further than its fundamentals justified. “The market overshot to the downside during the unwinding of leveraged positions, and the current rebound is a natural one as flow stabilized,” said Kang DaeKwun, chief executive officer at Life Asset Management.

There are still reasons for caution. The Kospi remains well below its June high, while foreign investors are still net sellers. More than $100 billion has left Korean equities this year, although lower valuations have begun attracting some overseas money back into the market.

Competition from China is another challenge for Korean memory-chip manufacturers. However the underlying demand for AI-related memory remains strong, with the expansion of AI into new applications creating additional demand for chips while supply remains constrained.

Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a registered financial advisor in the respective jurisdiction.