South Korean stocks slide into bear market as traders worry about AI chip maker's prospects
South Korea's stock market has entered a technical bear market, with investors expressing concerns about the long-term prospects of the AI chip maker that is driving the global rally. South Korea's Composite Stock Price Index (Kospi) fell more than 5% on Wednesday and is now down more than 20% from its all-time high set in June. A drop of more than 20% from a recent peak constitutes a technical bear market, but the Kospi is still up more than 70% in local currency terms so far this year, making it the world's best-performing major stock index. On Wednesday, the market's two largest heavyweights, Samsung Electronics and SK Hynix, fell 6.3% and 5.7% respectively. Shares of both companies have soared on demand for memory chips that are critical for data centers that underpin AI applications. However, market sentiment has begun to turn. Samsung shares plunged as much as 10% on Tuesday, even as the company forecast a third consecutive quarter of record operating profit. Analysts attributed the decline to a lack of clarity on how South Korean chipmakers will enforce long-term chip purchase agreements with customers. Companies such as Samsung have shifted their business models to include longer-term purchase agreements, but it is still unclear whether Samsung and SK Hynix can obtain similar contracts. "We haven't heard officially from our Korean counterparts yet on how they plan to execute these long-term contracts," said Lu Tailin, head of Asia-Pacific equity and derivatives strategy. Lu Tailin said the price-to-earnings ratio of South Korean chipmakers "may rise if they can shift to long-term contracts." "It's challenging to call it a bear market given that the fundamentals of the Korean market have been so strong over the past two years," he said. Volatility in South Korea's markets has been exacerbated by the popularity of leveraged exchange-traded funds (ETFs), which can magnify rises and falls. The head of South Korea's financial regulator warned on Tuesday of "excessive" leverage among retail investors in stocks. Some fund managers welcomed the decline, saying it was inevitable. Chan Lee of Petra Capital Management said: "This is a necessary adjustment because the previous rise was too steep and fast. There may also be buying opportunities outside of AI." "I don't think the story is over yet," said Jongmin Shim, Korea equity strategist at CLSA. "This is just a correction in the rise. Nothing goes up forever." The adjustment comes days after SK Hynix plans to list on a U.S. exchange for the first time with an issuance of US$29 billion, expected to be the largest stock issuance by an Asian company in history.