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South Korean stocks have entered a technical bear market as investors raise concerns about the long-term prospects of the AI chipmakers that have driven a world-beating rally.
The Kospi index is down more than 20 per cent from its record high in June after slipping more than 5 per cent on Wednesday.
A fall of more than 20 per cent from a recent peak represents a technical bear market, though the Kospi is still the world’s top-performing major stock index this year, having returned more than 70 per cent in local currency terms.
On Wednesday, the market’s two largest constituents, Samsung Electronics and SK Hynix, fell 6.3 per cent and 5.7 per cent, respectively. Shares of the two companies have surged as a result of demand for their memory chips, which are crucial for the data centres that power AI apps.
However, sentiment has started to turn. Samsung’s shares tumbled as much as 10 per cent on Tuesday, even though the company projected a third straight quarter of record operating profit.
Analysts attributed the declines to a lack of clarity on how South Korean chipmakers would enforce long-term agreements with customers over chip purchases.
US competitors such as Micron have shifted their business model to include longer-term purchasing agreements, but it remains unclear whether Samsung and SK Hynix have been able to secure similar contracts.
“At the moment we have not heard officially from the Korean peers how they plan on executing on these long-term contracts,” said Jason Lui, head of Asia-Pacific equity and derivative strategy at BNP Paribas.
Lui said South Korean chipmakers could see their price-to-earnings ratio rise “if they can move to longer-term contracts”.
“Given the fundamentals of how strong the Korean market has been over the past two years it’s challenging to call it a bear market,” he said.
Volatility in the South Korean market is being exacerbated by the proliferation of leveraged exchange traded funds that magnify gains and losses.
On Tuesday the head of South Korea’s financial regulator warned of “excessive” leveraged stock investments among retail investors.
Some fund managers welcomed the move downwards, saying it was inevitable.
“This is a necessary correction because the rise was too steep and fast,” said Chan Lee of Petra Capital Management. “There are possible buying opportunities outside of AI as well.”
Jongmin Shim, Korea equity strategist at CLSA, said: “I don’t think this story is over. It’s just a bit of a correction on the way up. Nothing goes up forever.”
The correction comes just days before SK Hynix plans to list shares on US exchanges for the first time in a $29bn offering that is expected to be the largest-ever share issuance by an Asian company.
