Last week, South Korea's stock market experienced a shocking downturn. The KOSPI closed at 5,668.05 on October 16, down 14.46% from the previous week, marking a 20.7% decline over seven consecutive trading days from October 6 to 15. Such a steep drop over this period has only been seen during the IMF financial crisis, the global financial crisis, and the COVID-19 pandemic. On October 15, the index fell by 7.57% in a single day, triggering circuit breakers in both the stock and KOSDAQ markets.
The trigger for this decline was skepticism regarding the profitability of the AI industry. CoreWeave, an AI cloud company, saw its corporate bonds enter distressed territory, and reports indicated a significant slowdown in revenue growth for leading frontier AI firms in the third quarter. The Philadelphia Semiconductor Index has now fallen for eight consecutive trading days, setting a record for the longest losing streak since the 2008 financial crisis.
However, the market interpretation does not suggest a collapse in AI demand. Analysts believe that the investment models reliant on borrowing and high valuations are being reassessed. It is too early to conclude that a bubble has burst or to dismiss this as a temporary adjustment. Nevertheless, it is painful to note that South Korea has been particularly hard hit. During the same week, the Nasdaq fell by 4.48%, the Philadelphia Semiconductor Index by 11.41%, and the Nikkei 225 by 5.37%, while the KOSPI's decline was 14.46%.
The underlying cause lies in the market structure. Samsung Electronics and SK Hynix account for half of the market capitalization of the KOSDAQ, and following the sharp drop in July, both retail and institutional investors lacked the capacity to absorb foreign selling. The end of Samsung Electronics' large-scale share buyback on October 7 removed a crucial support level. This year, foreign investors have sold a net 208 trillion won, and the National Pension Service reportedly incurred a loss of 182 trillion won in its third-quarter stock holdings. The market, heavily concentrated in these two stocks, has been swayed by foreign supply and demand.
Confidence in a rebound remains low. The KOSPI rose on October 16 after eight trading days of decline, and foreign investors returned to net buying after nine days. However, on October 19, the index opened down more than 3% before turning positive, only for foreign investors to resume net selling, leading to fluctuations. Securities firms have noted that the prices of large-cap semiconductor stocks are being influenced more by discount rates and selling pressure than by actual performance.
Looking ahead, uncertainties abound. From October 20 to 22, earnings reports from major tech firms like NVIDIA and Meta are expected, and an IPO from a leading AI company is scheduled for November. The Bank of Korea's Monetary Policy Committee will also meet on October 22. Rising international oil prices, inflation and interest rate uncertainties in the U.S., and concerns over technological competition from Chinese memory firms add to the complexity.
The government and financial authorities must revisit the capital market revitalization measures implemented over the past year. While they have expressed confidence in addressing factors contributing to the 'Korea Discount' through amendments to commercial law and strict measures against stock manipulation, the current state of the KOSPI suggests a disconnect between rhetoric and reality. Although institutional blind spots have been addressed, fundamental improvements may have been overlooked, leading to premature celebrations. As the stock market declines, questions arise internationally about the effectiveness of South Korea's financial authorities.
The government should now focus on broadening the supply and demand base rather than relying on artificial stimulus. It needs to foster long-term investment demand to alleviate the concentration in semiconductors and ensure that the announced shareholder return plans from companies at the end of this month are not just empty promises but are executed in practice. Investors should also avoid overreacting to daily fluctuations. At this moment, both optimism and pessimism regarding AI remain unverified. Maintaining market stability requires calm assessment rather than excessive certainty.
* This article has been translated by AI.
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