South Korea's KOSPI Swings From Record High to Bear Market in Weeks

South Korea’s main stock index has suffered a dramatic reversal, plunging into a bear market just weeks after a record-setting run. The KOSPI has shed a quarter of its value since late June, yet it remains by far the world's best-performing major equity market this year, underscoring the extreme volatility driven by an artificial intelligence boom.

A Market of Extremes

The benchmark index has fallen approximately 25% from its record closing high of 9,114.55 points, a move that officially confirms a bear market. Despite the sharp downturn, the KOSPI is still up roughly 60% year-to-date, dwarfing the 10% gain in MSCI’s global equities gauge, according to a Reuters report.

The market’s spectacular ascent was fueled by explosive earnings growth at semiconductor giants Samsung Electronics and SK Hynix. However, the rapid reversal has served as a "wake-up call," said Francis Tan, chief strategist for Asia at Indosuez Wealth Management, who noted that exposure to the chip sector "can be a volatile game."

Concentration and Leverage Fuel Volatility

The rally's foundations have proven fragile due to heavy concentration and widespread use of leverage. Samsung Electronics and SK Hynix now account for more than half of the KOSPI's total market value, meaning sharp moves in either stock can disproportionately sway the entire index.

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This concentration risk has been amplified by retail investors using borrowed money. Margin debt in KOSPI shares stood at 28 trillion won ($18.6 billion) on July 14, down slightly from a record high of 29.8 trillion won on June 24. This leverage has magnified both gains and losses, contributing to a spike in the KOSPI's volatility index to a record high of 97.99 on June 29.

South Korean regulators are taking notice. The Financial Supervisory Service said it would monitor leveraged products, while the Bank of Korea is watching whether single-stock ETFs could be distorting the market.

Diverging Investor Flows

The market's volatility has been exacerbated by a split between domestic and international investors. Foreign investors have pulled a record of nearly $110 billion from South Korean equities this year, largely to rebalance portfolios skewed by the market's massive gains.

This has left domestic retail investors to shoulder the buying. "What worries me is that retailers are in the driving seat, because they use a lot of margin," said Alexander Redman, chief equity strategist at CLSA. While strong profit forecasts for the chip giants have caused their forward price-to-earnings ratios to fall, some veteran investors remain cautious. "I don’t like to buy markets that have been going straight up," said investor Jim Rogers.