AI halo fading and foreign capital accelerating departure, South Korea’s stock market has shifted from the world’s strongest to the world’s weakest

The South Korean stock market was once the hottest global AI trading target this year, but is now facing a shortage of buyers.

In the first half of this year, South Korea’s Kospi attracted global capital inflows with the strongest performance among major global stock indices; entering the second half, the same market has cumulatively fallen by 22%, making it the worst performer worldwide. Meanwhile, stock markets in Chinese Taiwan and the United States, which are also heavily AI-themed, continue to hit record highs.

According to Bloomberg, foreign investors have made a net withdrawal of $131 billion from Korean stocks this year, the largest among major Asian markets. Market turnover has plummeted 70% from its late-May peak, with both retail and institutional investors retreating.

Two chip giants: an excessively concentrated bet

The rise and fall of South Korea’s Kospi is almost entirely dominated by two memory chip giants, Samsung Electronics and SK Hynix. Together, they account for more than 50% of the Kospi’s weighting, serving as the core drivers of the index’s surge in the first half of the year, but have now become a drag.

Phillip Wool, Head of Portfolio Management at Rayliant Global Advisors, bluntly said: “For most investors—especially those who only recently entered the South Korean market because of memory chip trading—the easy money in this theme has already been made.” He added that his fund has already taken profits on Korean AI stocks and currently holds underweight positions in SK Hynix and Samsung Electronics.

Market skepticism was laid bare last Thursday: Samsung Electronics' quarterly operating profit jumped nearly ninefold year-on-year, yet the share price declined rather than rose.

Repurchasing wave nears its end, buy-side support faces a vacuum

Another pillar supporting Korean stocks is also weakening.

Samsung and SK Hynix’s combined stock buyback plans, totaling about 55 trillion Korean won (about $41 billion), are about to be completed. According to JPMorgan data, out of roughly $23 billion in buy orders in the Korean market last month, the two chip companies’ buybacks accounted for the lion’s share.

Once the buybacks are completed, the market will face a clear vacuum in buy-side support.

Richard Tang, Head of Research for Hong Kong at Julius Baer, said: “We are seeing capital increasingly flowing back to U.S. stocks, which further exacerbates the persistent outflow of foreign capital from the Korean market.”

Retail investors exit, leverage funds have yet to recover

Retail investors were a key driving force behind the Kospi’s doubling in the first half of the year, but July’s plunge has kept them from returning.

Data from the Korea Financial Investment Association shows that margin balances have remained around 33 trillion Korean won over the past month, far below the June peak of 38.6 trillion won. Investor deposits awaiting entry to the market in brokerage accounts have also dropped from a historic high of nearly 140 trillion won to about 100 trillion won.

Jon Withaar, Singapore Portfolio Manager at Pictet Asset Management, said: “Memory chip stocks have become value stocks; based on current earnings, valuations are cheap. But retail investors and fast-money hedge funds do not chase value, they do not chase ‘cheap’—they chase growth.”

Taiwanese stocks emerge as an alternative; AI funds accelerate their shift

As Korean stocks lose appeal, the Taiwanese stock market in China is becoming the more preferred AI alternative for institutions.

The Taiwan Weighted Index has risen 70% this year, outperforming the Kospi by about 23 percentage points last quarter—the largest quarterly gap so far this century. The rally in Taiwanese stocks has also been more broadly based—about 10% of constituent stocks have at least doubled this year, compared to just 4.7% for the Kospi.

Chun-Lai Wu, Chief Investment Officer for Asia Asset Allocation at UBS Global Wealth Management, said: “Currently, we prefer to express tactical AI exposure via Taiwanese stocks, as Taiwan offers a more complete tech hardware ecosystem and benefits from robust spending plans by major technology companies.”

Of course, some investors also believe the decline of Korean stocks has created buying opportunities, arguing that AI spending and memory chip profitability remain resilient; coupled with Korea’s ongoing corporate value-enhancing reforms, this still offers some appeal. Thanks to this year’s strong rally in the first half, the Kospi remains among the top performers for the year.