Kospi rallies 4% as Citi downgrades on AI chip volatility
South Korea's Kospi snapped a brutal 10% two-day crash with a 4% rally driven by chipmakers, though foreign selloffs and retail leverage signal further instability.
The Kospi rose to 6,764 on Tuesday, snapping a two-session losing streak that saw the benchmark crash by 10%. The recovery was underpinned by chipmakers Samsung Electronics and SK Hynix, whose shares jumped as much as 6%. The two companies together constitute just over half of the Kospi, a heavy concentration that makes the broader index highly reactive to the semiconductor sector.
Even with the single-day rebound, the index sits nearly 28% below its June peak of 9,386. That rapid ascent to over 9,000 points was driven by an AI-fuelled surge, far outstripping the 5,000-point target set by President Lee Jae Myung just a year ago. A Seoul official noted on Wednesday that because this surge was historically unprecedented, the market would require time and fluctuation to stabilise.
Foreign institutional capital has been the primary driver of the recent downside. "The KOSPI's correction was mainly led by foreign equity investors' selloff in terms of rebalancing and profit-taking," Citi analysts wrote. "However, we believe foreign equity investors' selloff is moderating amid emerging signs of buy-on-dip capital flow.”
In response to the turbulence, Citi downgraded South Korean equities from overweight to neutral, a position it had maintained for the past year. The bank cited the heightened volatility now inherent in AI-linked chip stocks. While Citi remains structurally positive on the long-term AI investment theme, it has opted to reduce its tactical exposure to South Korea. The firm is reallocating within emerging markets, keeping Taiwan at overweight and upgrading China to overweight.
Domestic retail investors have suffered severe losses during these swings. Derivative products tied specifically to Samsung Electronics and SK Hynix wiped out major portions of the gains retail traders had accumulated earlier in the year. Looking ahead, Citi noted that client conversations are increasingly focused on the possibility of broader market leadership emerging in the second half of 2026, though the bank remains cautious about making a wholesale shift away from technology stocks.
