Kospi slides 38% from peak as AI rout sparks emergency talks

Asian stocks swung between gains and losses on Thursday as an AI-driven selloff in semiconductor heavyweights collided with Federal Reserve rate uncertainty and escalating Middle East tensions.

The MSCI Asia-Pacific index excluding Japan was little changed after flipping between positive and negative territory, as a rout in South Korea's Kospi deepened and Japan's Nikkei 225 fluctuated. The Kospi has plunged about 38% from its June record high of 9,410 to around 5,817, making it one of the worst-performing major benchmarks globally this year. The iShares MSCI South Korea ETF (EWY) has fallen to about $144 from a year-to-date high of $217.

"The combination of a tech-led unwind and macro headwinds from the Fed and geopolitics has created a perfect storm for Asian equities exposed to the AI supply chain," said Sarah Lin, equity market strategist at a New York-based research firm. "The Kospi's concentration risk — with Samsung and SK Hynix accounting for more than half the index — means any rotation out of memory stocks becomes an index-level event."

South Korea's finance minister, Koo Yun Cheol, called an emergency meeting on Wednesday with top financial authorities to address the market turmoil, according to lawmaker Yoo Dong-soo. Lawmakers blamed part of the selloff on the May introduction of leveraged single-stock ETFs, which fueled speculative buying before the reversal. The government has since banned those products, and the finance minister apologized to investors who suffered losses.

Semiconductor rout deepens as memory stocks lead declines

Samsung Electronics has fallen to about 223,500 won from 374,000 won, while SK Hynix dropped to roughly 1.42 million won from 2.98 million won. The Roundhill Memory ETF (DRAM), which tracks the biggest memory companies, has declined 43% from its all-time high. Foreign investors sold more than $62 billion worth of South Korean stocks through late May, a trend that Goldman Sachs said has continued.

The selloff extended beyond Korea. Asian tech stocks tracked declines in US peers after the Federal Reserve held rates steady and signaled no near-term cuts, disappointing investors who had hoped for a more accommodative stance. The Fed's decision pushed the Dow down more than 1,100 points in a single session, with chip stocks extending losses.

Geopolitical risks added to the pressure. Renewed US-Iran tensions pushed Brent crude above $87 a barrel and West Texas Intermediate to $84, raising concerns about energy costs for import-dependent Asian economies. South Korea, which relies heavily on Middle Eastern oil, faces the risk of higher inflation that could delay any potential rate cuts by the Bank of Korea.

What's at stake for Asian markets

The Kospi's decline has been compounded by deleveraging among retail investors who borrowed heavily to buy single-stock leveraged ETFs. KB Financial data showed domestic investors bought more than 14 trillion won ($9.7 billion) worth of these products, compared with 2 trillion won from foreign investors. As leveraged positions unwind, the selling pressure could persist even if the underlying stocks stabilize.

Traders are now watching for any intervention measures from South Korean authorities, as well as the Bank of Korea's next policy decision. The Fed's July meeting minutes and upcoming US jobs data will also determine whether the rotation out of AI-exposed equities continues or stabilizes.

This article is for informational purposes only and does not constitute investment advice.