Key Takeaways:
South Korea's KOSPI index surged 4.7% on Tuesday after Citigroup and Morgan Stanley declared the selloff overdone, with both firms maintaining bullish price targets despite a 30% plunge from record highs.
The KOSPI jumped 4.7% to 6,821.41, snapping a two-session rout that erased 28% from its June all-time high of 9,386. Samsung Electronics surged 7.4% and SK Hynix gained 6.4%, accounting for the bulk of the recovery after the benchmark fell 4.5% on Monday to its lowest level since February.
"The recent share price pullback of KOSPI equities, led by KR memory suppliers, is more of a technical correction driven by market-wide profit-taking and therefore could represent a potential buying opportunity," Citi analysts wrote in a note Monday, maintaining a 10,000 price target that implies more than 50% upside from Monday's close. Morgan Stanley kept a 9,000 target while setting a bear-case floor of 6,000 and flagging a three-to-six-month trading range between those levels, with data showing the index and chip stocks trading near historically low forward valuations.
The KOSPI has gained more than 50% this year but fell more than 20% over the past month as investors locked in profits and AI spending concerns rattled the semiconductor-heavy index. Chip stocks accounted for about 70% of the market's total value erosion since the second half began, according to Morgan Stanley. The Bank of Korea added to the pressure on July 16 by raising its benchmark rate 25 basis points to 2.75%, the first hike since January 2023, citing inflation that is expected to remain above the 2% target "for a considerable time."
Retail Leverage Unravels
The selloff has been especially brutal for South Korea's army of retail traders. Since single-stock leveraged ETFs tracking Samsung Electronics and SK Hynix launched on May 27, domestic investors have purchased a net 14 trillion won ($9.4 billion) of the products, compared with roughly 2 trillion won from foreign investors, according to KB Financial Group data. Those leveraged bets have soured as the two chipmakers lost more than a third of their value, exposing the risks of a speculative trading boom that helped fuel one of the world's hottest equity markets.
President Lee Jae Myung, who set a 5,000-point KOSPI target just a year ago when that seemed ambitious, is now sounding the alarm. "Our domestic stock market is quite unstable," Lee said at a policy meeting Wednesday, noting that the historically unprecedented surge in such a short period would require time and fluctuation to stabilize. Authorities last week banned new listings of single-stock leveraged ETFs, just two months after initially approving the vehicles.
Wall Street's Bet
Citi acknowledged it recently downgraded South Korea to neutral after keeping it overweight for the past year, citing heightened volatility in AI-linked chip stocks, but said it remains structurally positive on the long-term AI investment theme. The bank reduced tactical exposure to South Korea while keeping an overweight on Taiwan and upgrading China to overweight in its emerging markets allocation.
Morgan Stanley recommended a "barbell" strategy combining tech leaders with defensive sectors to capture potential upside while hedging against further downside, noting that conversations with clients increasingly focus on the possibility of broader market leadership emerging in the second half of 2026. Both firms cautioned that volatility may persist given uncertainty around AI spending trajectories, hyperscaler capital expenditure plans, and semiconductor supply dynamics.
The KOSPI's Tuesday recovery tracked broader Asian gains, with Japan's Nikkei 225 adding 2.8% to 65,926 and Taiwan's Taiex rising 3.6%. The rebound came as U.S. futures edged higher and chip stocks including Nvidia and Micron Technology posted gains in Monday's session.
This article is for informational purposes only and does not constitute investment advice.
