South Korea's benchmark Kospi index has officially entered a local bear market, tumbling 27% from its yearly peak as heavyweight technology and semiconductor stocks lose steam. The index now trades near 6,852 points, with investors bracing for the Bank of Korea's (BOK) upcoming interest rate decision on Thursday.
Massive wealth destruction
The sell-off has been brutal, wiping out more than $2.5 trillion in market value. The Wall Street Journal recently labeled South Korea "the world's craziest stock market," underscoring the severity of the downturn. Leading the decline are the nation's largest companies: Samsung Electronics has dropped 30% from its year-to-date high, while SK Hynix, a key player in the High Bandwidth Memory (HBM) sector, has slumped 42%. SK Square, which holds a substantial stake in SK Hynix, has plunged 52% from its peak.
The weakness extends beyond the Kospi. The Roundhill Memory ETF (DRAM), which tracks major memory chipmakers like Micron, Kioxia, and SanDisk, has fallen over 30% from its all-time high, reflecting a broader industry retreat.
Why the Kospi is under pressure
Several factors have contributed to the index's decline. First, profit-taking after a stellar run: the Kospi had surged to 9,387 points from a low of 2,295 last year, making a correction natural. Second, concerns about excessive leverage in the market have intensified. Margin loan balances jumped to over $27.7 billion in June from $19.4 billion in January, prompting investors to unwind positions.
Foreign investors have also been exiting. They sold billions of dollars worth of South Korean assets before the retreat, and the iShares MSCI South Korea ETF (EWY) has seen outflows for three consecutive days.
BOK decision in focus
All eyes are now on the BOK's rate decision. Economists expect the central bank to hold rates at 2.75%, but a 25-basis-point hike is possible to combat elevated inflation. The outcome could significantly influence market sentiment.
Technical outlook
From a technical perspective, the Kospi has rebounded off its August low of 5,279 points and is currently testing the 50-day exponential moving average. The index has formed an ascending channel, which some analysts interpret as a bearish flag pattern. If the sell-off resumes, the key support at 6,000 could be retested. Conversely, a breakout above the resistance at 7,198 points would negate the bearish setup.
For investors considering South Korean equities, the decision hinges on whether the current valuation discounts enough risk. The Kospi outlook remains clouded by global factors, including Nvidia earnings and memory chip supply concerns. As always, timing the bottom is challenging, and investors should weigh the risks carefully.
This article is for informational purposes only and does not constitute financial advice.
