The Kospi Index is stuck in a bear market after plunging 27% from its year-high as top constituent companies such as Samsung, SK Hynix, and SK Square lose momentum. It was trading at 6,852 points ahead of the upcoming South Korean Central Bank interest rate decision.
South Korean investors have lost $2.5 trillion
The Kospi Index, which tracks some of South Korea’s largest companies, has pulled back in recent months as major AI-related stocks have lost momentum. The decline has been particularly sharp given the index’s heavy exposure to technology and semiconductor companies.
The Wall Street Journal recently dubbed South Korea “the world’s craziest stock market,” highlighting the scale of the sell-off, which has wiped out more than $2.5 trillion in market value.
Samsung Electronics, the largest company in South Korea, has dropped by 30% from its year-to-date high. SK Hynix, the biggest company in the High Bandwidth Memory (HBM) industry, has slumped by 42% from its peak. SK Square, which holds a large stake in SK Hynix, has also plunged by 52% from its peak this year.
The ongoing retreat in SK Hynix and Samsung Electronics has coincided with the ongoing sell-off of other companies in the industry. The Roundhill Memory ETF (DRAM), which tracks the biggest memory companies, has dropped by over 30% from its all-time high. This includes top companies like Micron, Kioxia Holdings, and SanDisk.
Why South Korean stocks have dropped
There are a few reasons why the Kospi Index has retreated in the past few weeks. First, investors are booking profits after it had a strong performance earlier this year. It peaked at 9,387 points after soaring sharply from last year’s low of 2,295 points. It is common for assets to drop after such a strong surge.
Second, there are ongoing concerns about leverage in the South Korean markets as many retail and institutional investors borrowed heavily to invest in stocks. A recent report showed that margin loan balances jumped to over $27.7 billion in June from $19.4 billion in January. As a result, investors started to unwind some of these positions.
Further, there are signs that foreign investors started to unwind their positions. They sold assets worth billions of dollars before the retreat. And today, data shows that the iShares MSCI South Korea ETF (EWY), which has lost assets in the last three days.
Focus now shifts to the upcoming South Korean central bank interest rate decision that comes out on Thursday. Economists expect the bank to leave interest rates unchanged at 2.75%. It may also decide to hike rates by 25 basis points to curb the elevated inflation.
Kospi Index technical analysis
Kospi Index chart | Source: TradingView
The daily chart shows that the Kospi Composite Index peaked at 9,387 a few months ago and then plunged to a low of 5,279 points in August. It has since rebounded to the current 6,860 points.
The index has moved to the 50-day Exponential Moving Average (EMA) and has formed an ascending channel. This channel could be a bearish flag pattern. Therefore, there is a risk that the sell-off will continue in the near term. If this happens, the index may retest the key support of 6,000. On the other hand, a move above the key resistance at 7,198 points will invalidate the bearish outlook.
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