South Korea's Kospi, the world's best-performing major equity benchmark in 2026, has slumped over 30% in just a month, with analysts highlighting how the country's single-stock derivative products tied to chipmakers Samsung Electronics and SK Hynix wiped off major portions of gains recorded by retail investors this year.

Kospi crashed more than 4% on Monday to close at 6,516. It has now fallen more than 30% from its June peak of 9,386, comfortably falling in the threshold of the technical “bear market” following the skyrocketing rally earlier this year. Despite the latest crash, the index is still up more than 51% in 2026 so far.

Memory chip bellwethers SK Hynix and Samsung Electronics make up just over half of the benchmark Kospi. Much of the stock market’s previous rally was related to the sharp surge in the share prices of these two chipmakers. These two stocks have now crashed more than 30% each in just a month, leading to the sharp downtrend in the market.

Leverages bets on AI darlings impact South Korea’s stock market
The selloff came after heavy inflows into single-stock leveraged funds, which have drawn waves of retail investors while leaving them exposed to outsized losses when momentum reverses. Single-stock leveraged ETFs are designed to amplify the daily returns of an underlying stock, making them significantly more volatile than conventional ETFs. Regulators view these products as suitable only for investors with a high risk appetite and a clear understanding of their potential losses.

These instruments were introduced in May, and saw massive investor interest as the shares of the chipmakers rallied. However as the two stocks plunged, so did these ETFs, bringing massive downswings and not equally sharp recoveries in the market.

Also read: The ‘casino’ ETF causing havoc in South Korean markets

South Korean government scramble to protect investor wealth

Just a year ago, South Korea’s President Lee Jae Myung set a 5,000-point target for the Kospi, which seemed wildly ambitious. Little did investors know that the Asian market is going to blast past 9,000 driven by an AI-fuelled surge.

Just one year later, Lee is sounding the alarm as retail investors see massive wealth erosion. “Our domestic stock market is quite unstable,” Lee said at a policy meeting with top government officials in Seoul on Wednesday. He noted that since the country’s stock market experienced a historically unprecedented massive surge in such a short period, it would require time and fluctuation to stabilise.

Authorities last week moved to cool the speculative fever, announcing a ban on new listings of leveraged exchange-traded funds tied to individual stocks. The abrupt intervention comes just two months after regulators initially approved the vehicles.

"The FSS Governor has already admitted these products were approved too hastily, so this is a correction of a known policy error," Reuters quoted Inki Cho, a senior financial market strategist at online trading platform Exness, referring to the Financial Supervisory Service. "For retail investors holding these products, the risk is asymmetric: the leverage accelerates losses on the downside far faster than it builds wealth on the upside in a volatile tape like this,” he said.

Citi downgrades South Korea’s stock market
South Korea's stock market has lost its top spot in global investors' tactical playbooks, with Citigroup downgrading the country to a neutral stance after keeping it overweight for the past year, citing heightened volatility in AI-linked chip stocks.

Despite the downgrade, Citi said it remains structurally positive on the long-term artificial intelligence investment theme. According to Reuters, the bank has opted to reduce its tactical exposure to South Korea while keeping an overweight position on Taiwan and upgrading China to an overweight in its emerging markets allocation.

The brokerage also noted that conversations with clients are increasingly focused on the possibility of broader market leadership emerging in the second half of 2026. Even so, Citi remains cautious about making a wholesale shift away from technology stocks, Reuters said.

Also read: Korea’s AI stock rout is becoming a lesson in leveraged excess

(With inputs from agencies)
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