KOSPI enters bear market with 20% drop as AI rally unravels

The KOSPI plunged 5.7% to 7,246.79 on July 8, triggering a circuit breaker and entering a technical bear market 20% below its June record of 9,385.

"Semiconductor concentration has become a driver of market volatility," Koo Yun-cheol, South Korea's finance minister, said after convening an emergency meeting with the Bank of Korea and financial regulators.

Samsung Electronics and SK Hynix, which together account for roughly half the KOSPI's market capitalization, each fell 6% to 7% on July 8, extending a two-day rout that erased 13% from Samsung's value — even after the company reported a record 89.4 trillion won quarterly operating profit that exceeded both Apple and Nvidia.

The selloff has exposed a structural vulnerability: 16 leveraged single-stock ETFs tracking Samsung and SK Hynix traded 13.1 trillion won in a single session, creating a self-reinforcing unwind that regulators acknowledged they cannot easily halt.

Foreign investors have been the primary sellers, net disposing 148 trillion won of KOSPI stocks in the first half of 2026, with the pace accelerating to more than 1.3 trillion won daily in the past two sessions. The won's slide to 1,566 per dollar — its weakest in 16 years — has compounded the pressure, eroding the local-currency returns of dollar-based funds that rode the KOSPI's 60% surge from April through June.

The won's weakness creates a circular problem for policymakers. Raising rates could slow the currency's decline but would deepen the equity selloff. Cutting rates would accelerate capital flight. The Bank of Korea's 10 trillion won market stabilization fund is dwarfed by the 148 trillion won in foreign outflows this year alone.

Leveraged ETFs Become a Systemic Risk

The 16 leveraged and inverse single-stock ETFs on Samsung and SK Hynix have become the market's most dangerous feedback loop. When Samsung falls 3%, its 2x leveraged ETF falls 6%, triggering redemptions that force market makers to sell more Samsung shares. On July 7, these products accounted for more than a third of all ETF trading volume on the KOSPI, with 13.1 trillion won changing hands.

Lee Bok-hyun, governor of the Financial Supervisory Service, said on June 22 that he "deeply regrets" approving the leveraged ETFs, noting that peak turnover reached nearly 200% and brokerages collected 10 trillion won in fees. But regulators have not imposed new restrictions since the circuit breaker — any intervention risks triggering the stampede they are trying to prevent.

SK Hynix ADR Faces Hostile Reception

The timing could not be worse for SK Hynix, which is scheduled to list a $29.4 billion American depositary receipt on the Nasdaq on July 10 — the largest foreign ADR in U.S. history. Samsung's record profit was met with a 13% two-day decline, proving that semiconductor earnings no longer drive stock prices in this market. SK Hynix will need to convince the same institutional investors who are currently exiting Korean equities.

The KOSPI's decline has broader implications for global technology investors. The index more than doubled from late 2025 through mid-June, powered by AI infrastructure spending from Microsoft, Google, and Amazon. If the selloff deepens, it could spill into other Asian markets and global semiconductor ETFs that hold significant Samsung and SK Hynix positions.

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