The Kospi closing is displayed at 8,203.84 in a Hana Bank trading room in central Seoul on June 23.YONHAP
The benchmark Kospi suffered its steepest one-day decline on record, nearly 10 percent,on Tuesday, a sharp reversal for a market that had been buoyed by months of AI-driven exuberance.
Analysts said the surge in volatility was driven by a combination of AI-related valuation concerns, uncertainty over US interest-rate policy, fears of National Pension Service (NPS) rebalancing and debate over proposed tax changes.
The Kospi closed at 8,203.84, down 910.71 points, or 9.99 percent, from the previous session, according to the Korea Exchange.
Foreign investors sold a net 4.14 trillion won ($2.7 billion), while institutions unloaded a net 4.51 trillion won.
Retail investors, on the contrary, purchased a net 8.52 trillion won, the largest daily net buying figure ever recorded by individual investors.
The sharp decline triggered a sell-side sidecar, which temporarily suspends program sell orders, in both the Kospi and the junior bourse Kosdaq markets.
People celebrate the Kospi's 9,000-threshold crossing at Woori Bank in central Seoul on June 18.NEWS1
A Level 1 circuit breaker, which halts trading for 20 minutes, was also activated on the Kospi.
Sidecars have now been triggered 27 times in the Kospi market this year. It has already surpassed the record during the 2008 global financial crisis — 26 times.
This year, circuit breakers have been activated four times, setting a new annual record.
The figures underscore how the market has experienced both unprecedented gains and record-breaking volatility this year.
Market participants traced Tuesday's plunge to a dramatic shift in market leadership a day earlier. SK hynix, which had dethroned Samsung Electronics as the Kospi's most valuable listed company for the first time in 26 years, tumbled more than 12 percent. Samsung Electronics also fell 12 percent. Both stocks suffered their sharpest one-day declines in 17 years.
“Investors interpreted the mere fact that a company generating less profit than the previous market leader had risen to the top spot as a sign that the market had become overheated,” said Kim Dae-jun, senior researcher at Korea Investment & Securities.
“Weakness in U.S. equities, concerns about AI profitability, and disappointing performance among hyperscale companies also weighed on investor sentiment.”
“Much of the market’s recent momentum had been driven by expectations that SK hynix would secure approval for a U.S. American Depositary Receipt (ADR) listing and Korea’s potential entry into MSCI’s developed markets index,” said Jo Ah-in, analyst at Samsung Securities.
Exchange rates are displayed on an electronic board in central Seoul on May 26.NEWS1
“Those anticipations weakened as ADR approval was delayed and the drive for MSCI inclusion was thwarted.”
Some analysts also argued that single-stock leveraged exchange-traded funds (ETF) tied to Samsung Electronics and SK hynix amplified volatility in a market, which has already become highly sensitive due to heavy concentration in semiconductor giants.
“When stock prices rise, leveraged ETFs purchase additional shares to maintain exposure, but when prices fall, they must sell shares as part of rebalancing,” a financial investment industry source said. “That is one reason institutional selling outweighed retail buying despite aggressive purchases by individual investors.”
The market also appeared to be belatedly factoring in the possibility of higher interest rates.
Bank of America expected the U.S. Federal Reserve (Fed) to raise interest rates three times this year by 0.25 percentage points each, according to the U.S. private bank’s recent report.
The forecast marked a significant shift from its earlier expectation that rates would remain unchanged, following the Federal Open Market Committee (FOMC) meeting this month.
“Investor appetite for semiconductor and AI-related stocks, which has driven much of the recent rally, is showing signs of fading ahead of the announcement of the U.S. Personal Consumption Expenditures,” said Seo Sang-young, a researcher at Mirae Asset Securities.
“If inflation rates turn out higher than expected, the possibility of further Fed interest rate hikes will be highlighted, potentially spreading concerns about liquidity contraction centered on overvalued semiconductor and AI stocks,” Seo added.
Housing prices which hovers around 3 billion won ($1.95 million) are attached on a realtor's office in Songpa District in southern Seoul on June 14.YONHAP
Concerns about domestic stock sales by the NPS have also emerged as a burden on the market.
Earlier this year, the NPS temporarily relaxed its rebalancing requirements through the end of June and widened the target range for domestic equities. It allowed the institution to hold local stocks up to 28.8 percent of its portfolio.
However, the recent surge in the Kospi is believed to have pushed its actual domestic equity allocation beyond that level.
“Domestic stocks appear to have accounted for 31.4 percent of the pension fund’s portfolio as of last Friday,” said Lee Kyung-min, a researcher at Daishin Securities. “With the domestic equity allocation exceeding the upper end of the permitted range, selling pressure is increasing.”
State-run pension funds, including the National Pension Service, have sold a net 1.35 trillion won over the past six trading sessions and 2.48 trillion won over the past month.
Market participants believe much of that selling came from the NPS.
Some analysts estimate that portfolio rebalancing could eventually result in sales worth 50 trillion to 60 trillion won.
“The fund is managed under the principle of minimizing market disruption,” Kim Sung-joo, CEO of the NPS, said on Tuesday.
Meanwhile, tax policy discussions in political circles added to market anxiety.
Lawmakers from the ruling liberal bloc discussed a proposal to tax unrealized gains from stock and property investments — in a move to treat paper profits as taxable income — during a parliamentary forum on Tuesday.
“Discussions about taxing unrealized gains are likely to weaken investor sentiment and increase downward pressure on the stock market,” Lee of Daishin Securities said.
This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
