From the "Korean Wave" frenzy to the "cold wave" trampling! Oil prices skyrocket, overturning the South Korean stock market with the most severe drop since 2008.

Large-scale panic selling continues to sweep through major South Korean exchanges, causing a historic and intense plunge on Wednesday following a tumultuous drop on Tuesday. Throughout the past year, the South Korean stock market has been considered the hottest emerging market globally, with the South Korean benchmark stock index, Kospi, surging by as much as 75% in 2025. Leading the world in performance for the year, the South Korean stock market experienced a wild ride, with a 50% surge in early 2026 driven by a surge of global funds boosting the benchmark index. However, since the opening bell this week, the South Korean stock market has seen a rapid decline. After plummeting by 7.2% on the previous trading day, the South Korean stock market experienced a further drop of over 12.5% on Wednesday, propelling the Kospi index towards its largest consecutive two-day decline since 2008, and possibly its largest single-day drop. The stocks that had been driving the previous surge, including Samsung Electronics, SK Hynix, and Hyundai Motor, were the ones responsible for the current decline due to a forced sell-off of leveraged bets by hedge funds. Following a drop of 8% in the relevant indexes, trading of Kospi and Kosdaq stocks was temporarily suspended for 20 minutes. Despite being dubbed the "world's strongest stock market," South Korean stocks have recently faced their most severe two-day plummet since 2008, attributed to the sharp rise in oil prices due to the Middle East conflict, massive foreign capital withdrawal, pressure on the South Korean won, and forced closing of leveraged positions. The Chairman of the South Korean Financial Services Commission, Lee Yu-won, has urged relevant institutions to be prepared to activate emergency plans if necessary, including the use of a market stabilization fund exceeding 100 trillion Korean won (approximately $ 68 billion), which was previously used during the Lehman credit crisis. The unprecedented AI boom undoubtedly helped propel the South Korean stock market to achieve significant gains, but with the recent military conflicts in the Middle East causing a rapid rise in oil prices, threatening global central banks' prospects for easing monetary policy, and putting significant economic pressure on Asia, investors are reassessing their heavy bets on the already overvalued stock markets. As shown in the chart above, with significant selling by foreign investors, the decline in the South Korean stock market has worsened. Before the sharp drop on Tuesday, the South Korean Kospi index, following a 75% surge in 2025, was still considered the "world's strongest stock market" in 2026, with a surge of over 50% at one point, outperforming global markets. The AI panic trading theme was reshaping investors' asset allocation logic, redirecting global institutional and retail funds from the US to the most concentrated participants in the AI power chain in Asia, particularly South Korea and Taiwan. In February, the MSCI Asia Pacific index recorded its best performance in February since its establishment in 1998, with the South Korean stock exchange ranking as the ninth largest in the world. The recent trading pattern has favored semiconductor and AI infrastructure stocks, predominantly in emerging Asian markets, over software stocks. Citrini Research's "Memo for the AI Flourishing Crisis" is reinforcing the bet that the Asian AI power chain involving key chip manufacturers such as TSMC and a plethora of chip manufacturing and AI infrastructure companies in South Korea and China will emerge as the biggest winners in the AI disruption trend. In contrast, the US market, with high exposure to software and light assets, is facing turbulence. For most of the past year, the South Korean stock market has been somewhat of an outlier in the global market: even on days when most global stock markets were falling, it was rising, shrugging off the so-called "AI panic trading." The insatiable demand for storage chips driven by AI data centers propelled Samsung and SK Hynix stock prices to skyrocket, and the government's push for corporate reform led to a reassessment of this long-underestimated market. If the market continues to decline from here, the resilience of the South Korean stock market will be put to the test. Investors are debating whether this signifies a turning point for South Korea, or if it is just a pause before the next upward trend. "It looks more like a position unwinding frenzy rather than a fundamental breakdown specific to the South Korean AI theme," said Dave Maza, CEO of Roundhill Investments. "When the global risk appetite turns toward risk aversion, energy prices and foreign exchange volatility spike, you'll see funds rapidly derisk towards those index-heavy stocks with the biggest increases." In early Asian trading, foreign entities sold off assets related to the Korea Kospi index ETFs, with the latest data showing foreign selling reaching up to 1 trillion Korean won, while retail investors and local institutional investors slightly increased their holdings. The Kospi 200 volatility index, reflecting option prices, surged to its highest level since March 2020. Not all stocks are falling. Analysts believe that the instability in the Middle East could continue, resulting in continued growth in South Korean defense and military stocks. LIG Nex1 Co. and Hanwha Systems Co. saw their stock prices rise by over 25% intraday. Matthews Asia portfolio manager Park So-jung said this "could create opportunities to selectively build positions in companies and industries that are attractively priced at current levels." "South Korean industrial stocks, such as the defense and shipbuilding sectors, may once again be highlighted as beneficiaries of global turmoil, supply constraints, and the increasing strategic importance of South Korean companies." "Local brokerages have started to stop providing margin trading, and we are seeing weakness in retail investors buying the dip today," said Seoul-based stock trader Sean Wu from NH Investment & Securities. "Concerned about additional margin calls, we may see further weakness in the final hour of trading." Why did the South Korean stock market suffer so heavily from the escalation of geopolitical conflict in the Middle East? The recent slump in South Korean stocks seems more like a sharp cooling off after being hit by the oil price shock, rather than a debunking of the AI investment theme itself. If the situation in the Middle East quickly eases, oil prices fall, and the Korean won stabilizes, then South Korean stocks will likely be viewed as a bull market vehicle for AI power infrastructure and South Korean reform trades once again. However, if the geopolitical conflict prolongs, energy prices remain high, the high beta stock market overly reliant on a single AI narrative could quickly shift from the strongest to the most pressured. The primary reason for the sharp drop in South Korean stocks lies in the excessive surge and crowded positions leading to them being considered a cash machine at the first sign of external shocks, rather than a fundamental crisis of AI investment themes experiencing a "sudden deterioration". Essentially, it is the unwinding of leveraged positions and profit-taking from crowded AI theme positions. The second core reason is that South Korea exhibits greater "macro vulnerability" to a new round of military conflict in the Middle East compared to many markets, which would quickly impact the macro valuation framework of South Korean stocks. As the eighth-largest oil consumer globally and highly dependent on imported energy, oil price shocks would rapidly impact the macro valuation of South Korean stocks. Following the conflict in Iran and the surge in oil and natural gas prices, the market immediately anticipates challenges for South Korea, including "rising input inflation, deteriorating trade conditions, pressure on the Korean won, and delayed expectations of a Fed rate cut." Brent oil prices surged by over 15% this week, with the Korean won falling to its lowest point in 17 years under the significant pressure of the strengthening US dollar, leading to increased risk aversion for an economy highly dependent on imported energy.