Key Takeaways:
A dramatic divergence is reshaping Asian equity markets, with Hong Kong's benchmark climbing 14% from its 2026 low while South Korea's Kospi has cratered 40% from its peak and Japan's Nikkei 225 has shed 15%.
The Hang Seng Index has rebounded 14% from its 2026 trough, even as the Kospi plunged as much as 12.6% on Wednesday and the Nikkei 225 extended its decline to 15% from its year-high.
"It's certainly a very crowded trade which is being unwound," said Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong. "If you look at what is falling in the market, it has been the stocks in which you have the most leverage."
The Kospi closed down 6% on Wednesday after an intraday rout that triggered a 20-minute trading halt, extending Tuesday's near-11% collapse. The two-day wipeout has erased about $2.18 trillion from Seoul's equity market. SK Hynix shares slumped 9.6% even after reporting a six-fold jump in profit, while Samsung Electronics fell 5.2%. Taiwan's TSMC dropped 3.5% in Taipei.
The divergence signals a potential capital rotation out of Japan and South Korea into Hong Kong and China markets, with the Hang Seng's resilience attracting foreign inflows even as leveraged retail investors in Seoul face forced liquidation of positions built during the AI rally.
South Korea's finance minister, Koo Yun-cheol, apologized before parliament for the introduction of single-stock leveraged ETFs, saying they had not been considered carefully enough. The government is reviewing market stabilization measures, including adjusting regulation related to the funds, which analysts have blamed for amplifying the scale of leveraged trading on the Seoul bourse.
"Hopes of the market rebounding today after a 10% plunge yesterday faded, triggering panic selling and forcing most stock investors to book losses," said Han Ji-young, an analyst at Kiwoom Securities. "Doubts are prevalent in the market that the current index level would not be the bottom."
Leverage Unwind Accelerates the Rout
Much of the buying in South Korean equities during the AI rally was done by retail investors using borrowed money. That dynamic, which accelerated the Kospi's ascent to a record high just over a month ago, is now exacerbating the selloff as brokers forcibly close losing positions. The Kospi has erased almost 40% of its value from that peak, though it remains up 41.5% in dollar terms year-to-date.
"Today's price action suggests that the leverage within Korean equities remains high and a further unwind could be expected," said Wee Khoon Chong, Asia-Pacific macro strategist at BNY in Hong Kong.
The Korean won weakened past 1,451 against the dollar, adding to the pressure on foreign investors who have been reducing exposure to Seoul-listed stocks.
Hang Seng Draws Rotational Flows
The Hang Seng Index's 14% rebound contrasts sharply with the pain in Seoul and Tokyo. Hong Kong-listed stocks have benefited from a rotation out of overheated AI-exposed markets, with the Hang Seng's relatively lower valuation and China's policy support providing a floor. The divergence has widened as South Korea's semiconductor-heavy index bore the brunt of the AI trade unwinding, while Hong Kong's more diversified composition — including consumer, property, and financial names — has offered a buffer.
The Nikkei 225's 15% decline from its year-high, while less severe than the Kospi's collapse, reflects similar pressures from the global AI trade unwind and a strengthening yen that has weighed on Japan's export-heavy index.
This article is for informational purposes only and does not constitute investment advice.
