AI Spending Fails to Halt Sell-off: Unpacking South Korea's Market Decline
Last week, South Korea's stock market experienced a downturn that seemed at odds with prevailing optimism. A recent Goldman Sachs report on the Korean market highlights a central paradox: while foreign investors continued buying into the KOSPI index and expectations for increased AI capital expenditure bolstered the semiconductor demand story, the KOSPI still fell approximately 2% for the week. This divergence underscores the market's current complexity.
The Divergence Between Sector Performance and Fund Flows
A closer look at sector performance reveals clear areas of resilience and vulnerability. Construction, software, and telecommunications sectors showed relative strength, while securities, automobiles, and insurance led the declines. The trading session on July 24th was particularly notable, with the KOSPI plunging 5.72% to close at 6690.62, after touching an intraday low of 6650.41. The sell-off was severe enough to briefly trigger a halt in program trading.
According to Yonhap News Agency, escalating tensions in the Middle East significantly dampened global risk appetite. The fund flow picture that day was stark: foreign and institutional investors combined for a net sell-off of about 5.2 trillion won, creating substantial downward pressure. In a contrasting move, Korean retail investors stepped in as net buyers, purchasing approximately 5.18 trillion won, nearly matching the institutional sell-side volume.
Structural Pressures Identified by Goldman Sachs
Goldman Sachs' analysis digs deeper beneath the surface. The report acknowledges that foreign inflows are indeed concentrated in the technology sector, providing a key support pillar. However, a significant medium-term headwind remains: the broader Korean market continues to face substantial net fund outflow pressure. A critical data point is that foreign holdings in the much-watched semiconductor sector remain near historical lows, suggesting international investor confidence in Korean tech stocks is still in a rebuilding phase.
The earnings foundation is also showing cracks. Goldman notes that the market's earnings per share (EPS) expectations for the KOSPI over the next 12 months were revised down by 0.4% overall, with the automobile sector facing the most significant downward pressure. This indicates the fundamental profit support for stock prices is weakening.
Market "Fuel" Is Dwindling: Leverage Cools Significantly
Beyond foreign flows and earnings, another key driver of market activity—leverage—is quietly receding. Data from the Goldman report shows that margin balances held by Korean retail investors have declined from a peak of $25 billion to $22 billion. More strikingly, the scale of leveraged exchange-traded funds (ETFs) has been halved, dropping from a high of $53 billion to around $26 billion.
The reduction in leverage means a potential "amplifier" for market volatility is fading, but it may also reflect a shift in sentiment and lower risk appetite among retail investors.
Conclusion: Navigating Contradictions
In summary, the Goldman report sketches a Korean stock market at a crossroads. The wave of capital expenditure driven by artificial intelligence remains the dominant narrative and primary source of support. Yet, this force is meeting a trio of headwinds: broad downward revisions to corporate earnings expectations, light overall positioning by foreign investors, and fluctuating global risk appetite due to factors like geopolitics.
Amid these combined forces, the short-term elasticity of the Korean stock index may remain elevated, with volatility likely to persist, even with a powerful long-term narrative in place. For investors, embracing the AI trend requires equally close attention to these structural, short-to-medium-term indicators: fund flows, leverage trends, and earnings revisions.