South Korean Stocks Drop 40% Amid AI Hype

South Korea’s stock market has fallen nearly 40 percent in recent weeks, erasing billions of dollars in investor wealth and highlighting the speed at which AI enthusiasm can outpace economic fundamentals, according to an academic specialist.

AI chip boom fuels volatility

The sharp decline has been linked to a surge in demand for artificial‑intelligence chips combined with aggressive, leveraged trading. The turbulence triggered multiple circuit‑breaker events and left many investors scrambling to reassess positions.

Professor Angel Zhong of RMIT’s School of Economics, Finance and Marketing said the sell‑off illustrates how quickly a technology narrative can convert into market optimism—and how swiftly that optimism can reverse.

“What we’re seeing in South Korea is a reminder of how quickly technology narratives can translate into market enthusiasm, and how quickly that enthusiasm can reverse,” Zhong explained.

She added that while AI offers real economic opportunities, markets often price in expectations well before benefits materialize. When investors concentrate heavily on a single theme—whether AI infrastructure, semiconductors or another high‑growth story—valuations can drift away from underlying fundamentals.

“The key takeaway is not the decline in share prices, but how leverage amplified both the gains and the losses,” she said.

Analysts see entry points amid the pullback

Morgan Stanley recently upgraded the South Korean market to overweight, citing the “leverage washout” and technical sell‑off as signs of a strong entry point for AI‑related and industrial super‑cycle themes. The firm projects a 36 percent upside for the KOSPI index, targeting a level of 9,000.

In a client note, the bank wrote, “We believe we are past the midpoint of unwinding leveraged ETFs, hedge fund leverage and retail margin.”

Capital Group echoed concerns about volatility, noting that it hampers Korea’s progression from an emerging to a developed market. The country currently accounts for 23.7 percent of the MSCI Emerging Market index, second only to Taiwan.

According to MSCI, Korea was the world’s top‑performing market through late July, driven largely by memory‑chip makers Samsung and SK Hynix.

SK Hynix reported record second‑quarter 2026 results on 29 July, posting a net profit of 93.92 trillion won (about A$93.4 billion). However, revenue of 79.32 trillion won and operating profit of 60.54 trillion won fell short of analyst expectations, prompting a sharp sell‑off across Asian chip stocks.

For many small‑cap investors, the rapid swing means rethinking risk exposure. Those who entered the market on the back of AI hype may now face margin calls, while longer‑term holders might view the correction as a chance to diversify beyond a tech‑heavy portfolio.