Synopsis : South Korea’s Kospi has staged a sharp recovery after plunging 22% in July, with Samsung Electronics and SK Hynix leading the rebound. Continued AI infrastructure spending, improving semiconductor expectations and easing selling pressure are supporting the recovery, although high dependence on the AI hardware cycle remains a key risk.
South Korea’s stock market has staged a sharp recovery after suffering one of its steepest monthly sell-offs in years.
The Kospi jumped around 4% on Thursday, rising roughly 22% from its July 30 closing level. The rebound marks a dramatic reversal from July, when the benchmark plunged around 22% — its worst monthly decline since the 2008 global financial crisis.
Despite the recovery, the Kospi remains about 24% below its late-June peak. The index, however, is still up more than 60% so far this year.
The latest rally has been heavily driven by South Korea’s semiconductor giants. Samsung Electronics gained nearly 5%, while SK Hynix surged almost 10%.
This raises an important question for investors: is the rebound simply a technical recovery after an excessive sell-off, or are markets beginning to regain confidence in the earnings outlook for Korean semiconductor companies?
Why did the Kospi fall so sharply in July?
The magnitude of July’s decline made it appear as though the fundamentals of South Korean companies had deteriorated dramatically.
However, analysts at Macquarie Capital believe the sell-off was driven largely by positioning, fund flows and forced selling rather than a major deterioration in corporate earnings.
Foreign and institutional selling has eased since the end of July, while margin financing remains at manageable levels, according to the brokerage.
Macquarie described the volatility as having largely passed.
The concentration of the July losses is also significant.
Samsung Electronics and SK Hynix alone accounted for around 71% of the Kospi’s decline during July. Together, the two stocks fell around 48%, while the rest of the market declined by less than 10%.
That concentration has now started working in reverse.
As Samsung and SK Hynix recover, their enormous weight in the benchmark is helping pull the broader Kospi higher.
Samsung and SK Hynix lead the recovery
The semiconductor sector has once again become the centre of attention for investors.
Samsung Electronics and SK Hynix are among the world's major suppliers of memory chips, including products used in artificial intelligence infrastructure and data centres.
Their performance is therefore closely linked to global spending on AI infrastructure.
Macquarie expects the two companies to remain important drivers of the Korean market in the near term, particularly as demand for memory chips continues to increase.
The brokerage has also argued that the memory market could remain tight for several years because supply has not expanded quickly enough to keep pace with AI-related demand.
This creates an important backdrop for Korean technology stocks.
If demand continues growing faster than supply, memory-chip manufacturers could benefit from stronger pricing and earnings.
AI spending remains the biggest support
The recovery in Korean technology stocks is also being supported by the continuing global AI investment cycle.
Recent results and commentary from US technology companies have suggested that spending on AI infrastructure remains strong.
That matters for South Korea because Samsung and SK Hynix supply critical memory components used in AI data centres and computing systems.
David Morrison, senior market analyst at Trade Nation, said the AI spending boom remains far from over.
Better-than-expected results from companies such as Supermicro and cloud provider CoreWeave have also reinforced expectations that technology companies are continuing to invest heavily in AI infrastructure.
For Korean chipmakers, this could translate into sustained demand for memory products.
Qian Zhang, emerging markets equities investment specialist at Baillie Gifford, highlighted the physical supply constraints facing the memory industry.
The rapid expansion of AI applications has increased memory demand, while available supply capacity remains limited.
That imbalance could continue supporting semiconductor earnings if AI infrastructure spending remains strong.
Is the Kospi rebound more than just a technical bounce?
There are signs that the recovery is beginning to receive support from fundamentals.
The iShares MSCI South Korea ETF has moved above an important technical level following the gains in Samsung Electronics and SK Hynix.
Fundstrat Global Advisors’ Mark Newton believes the move has created a more favourable technical setup for Korean equities and could support further near-term gains.
The recovery in memory stocks is particularly important.
These companies were among the biggest casualties during July’s sell-off. Their renewed outperformance suggests investors are becoming more comfortable rebuilding exposure to the semiconductor sector.
Newton described the improving performance of memory stocks as a positive short-term signal for the broader technology sector.
Given the weight of Samsung Electronics and SK Hynix in the Kospi, continued strength in these stocks could remain an important driver for the benchmark.
But the Kospi is becoming increasingly dependent on AI
The same factor that is supporting the recovery also represents one of its biggest risks.
South Korea’s equity market has become increasingly tied to the global AI hardware cycle.
Any indication that major technology companies are preparing to reduce AI infrastructure spending could therefore have an outsized impact on Korean stocks.
Phillip Wool, head of research at Rayliant Global Advisors, said the Korean equity market has effectively become closely associated with the AI hardware trade.
He believes the latest rally has both technical and fundamental components.
Forced selling has eased, investors who had been waiting on the sidelines have returned, and improving sentiment has added to the momentum.
At the same time, stronger technology earnings have helped reinforce expectations for continued AI infrastructure investment and semiconductor earnings.
However, that optimism could quickly reverse if the AI narrative weakens.
Any reduction in capital expenditure guidance from major cloud companies, weaker AI-related demand or renewed concerns around monetary policy could trigger another pullback.
US yields and the dollar remain important risks
The Kospi’s recovery is also sensitive to global macroeconomic conditions.
US Treasury yields and the US dollar are two factors investors will continue monitoring.
A sharp rise in US yields could reduce the attractiveness of emerging-market equities and put pressure on risk assets.
Similarly, a stronger dollar can create additional challenges for emerging-market markets, including South Korea.
Fundstrat’s Mark Newton remains constructive on Korean equities in the near term but believes a renewed rise in yields or the dollar could eventually put pressure on the recovery.
South Korea’s “Korea discount” could also be narrowing
The current rally is taking place against a broader effort by South Korea to make its equity market more attractive to global investors.
The government has been pushing corporate-governance reforms and its so-called Value-Up programme, aimed at encouraging companies to improve shareholder returns, capital efficiency and corporate governance.
These reforms are intended to address what investors have historically called the “Korea discount” — the tendency for South Korean companies to trade at lower valuations than comparable businesses in other markets.
Billy Leung, investment strategist at Global X ETFs, believes these reforms have helped narrow that valuation gap.
However, the key question remains whether the improvement is sustainable.
A stronger market driven by improving earnings and shareholder returns would be fundamentally different from a rally driven primarily by speculative flows.
Why investors should not expect another straight-line rally
Despite the sharp recovery, some analysts remain cautious about calling this the beginning of an entirely new bull market.
Jung In Yun of Fibonacci Asset Management Global believes it is too early to describe the move that way.
In his view, the rebound reflects a combination of the market recovering from forced selling and a return of stability.
The longer-term outlook can remain positive if semiconductor earnings continue improving and investor sentiment strengthens, but the pace of the recent recovery may not be sustainable.
After such a sharp rebound, some consolidation would be normal.
Investors therefore should not assume that the Kospi will continue rising at the same speed seen during the latest recovery.
What comes next for the Kospi?
The recent rebound suggests that July’s collapse may have been less about a fundamental breakdown in the AI and semiconductor investment story and more about the unwinding of crowded positions and leverage.
Peter Kim, head of global investment strategy at KB Securities, argued that the AI rally and strong earnings remained largely intact during the sell-off.
In this view, fundamentals did not suddenly deteriorate. Instead, technical factors, fund flows and deleveraging amplified the market decline.
That may explain why the recovery has been so rapid.
Kang DaeKwun, chief executive officer at Life Asset Management, similarly argued that the market had overshot on the downside as leveraged positions were unwound.
As flows stabilised, the subsequent rebound became a natural response.
However, the risks have not disappeared.
The Kospi remains below its June peak, while foreign investors have continued to be net sellers.
More than $100 billion has reportedly flowed out of Korean equities this year, although lower valuations have begun attracting some overseas investors back into the market.
China remains another challenge
Korean semiconductor companies also face increasing competition from China.
Chinese companies are investing heavily in their own semiconductor capabilities, which could create competitive pressure over time.
However, the structural demand for AI-related memory remains an important positive.
AI is expanding beyond traditional data-centre applications into areas such as AI agents, robotics and physical AI. These applications could create additional demand for memory and other semiconductor components.
The key issue will be whether supply can keep up with this expanding demand.
Conclusion
The Kospi’s sharp recovery shows just how quickly sentiment can change when a heavily sold-off market begins to stabilise.
July’s 22% decline was amplified by fund flows, positioning and forced selling, with Samsung Electronics and SK Hynix accounting for a large portion of the damage.
Now, the same semiconductor giants are helping drive the rebound.
The fundamental backdrop has also improved, with continued AI infrastructure spending supporting demand for memory chips and improving expectations for Korean semiconductor earnings.
But the recovery is not without risks.
The Kospi remains well below its June peak, foreign investors are still cautious and the market’s dependence on the AI hardware cycle leaves it vulnerable to any slowdown in technology spending.
For now, the evidence suggests that the market is moving from a period of forced selling towards a more stable environment.
The bigger test will be whether strong semiconductor earnings and sustained AI demand can turn this sharp rebound into a durable recovery — rather than simply another technical bounce.
Synopsis : South Korea’s Kospi has staged a sharp recovery after plunging 22% in July, with Samsung Electronics and SK Hynix leading the rebound. Continued AI infrastructure spending, improving semiconductor expectations and easing selling pressure are supporting the recovery, although high dependence on the AI hardware cycle remains a key risk.
Disclaimer
This article is intended for informational and educational purposes only and does not constitute financial advice, an offer, solicitation or recommendation to buy or sell any security. The views and market commentary cited are based on analyst and third-party research and may change without notice. Investors should conduct their own independent research and consult a qualified financial advisor in their respective jurisdiction before making investment decisions.
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