Kospi enters bull market with 20% rebound as AI trade revives

South Korea's Kospi climbed more than 20 percent from its July 30 low, returning to bull-market territory on renewed optimism over AI infrastructure spending.

"The AI rally and continued strong earnings have been a constant during the sell-off, so it is fundamentals returning the market back to normalcy rather than the other way around," said Peter Kim, head of global investment strategy at KB Securities.

The benchmark jumped over 4 percent in early trade Thursday, with Samsung Electronics rising more than 4 percent and SK Hynix over 7 percent, LSEG data showed. The rebound follows a rout that erased 2,257.8 trillion won ($1.59 trillion) in market value from the Kospi's June peak, with the two chipmakers accounting for 76 percent of the decline. July marked the benchmark's worst monthly loss since the 2008 global financial crisis.

The speed of the turnaround raises a question: how long can the rally last? Bulls point to strong U.S. technology earnings and continued commitments to AI infrastructure spending as evidence that demand for memory chips will remain strong. Bears warn the index's dependence on a handful of semiconductor names leaves it exposed to any shift in AI spending expectations.

Chip concentration cuts both ways

The Kospi's reliance on Samsung and SK Hynix makes its bull run overly exposed to shifts in AI spending expectations. "Korea's equity market is basically synonymous with the AI hardware trade at this point," said Phillip Wool, head of research at Rayliant Global Advisors.

Wool said the rebound has been partly technical, as forced selling subsided, dip buyers returned and fear of missing out took hold. But stronger-than-expected Big Tech earnings have also reinforced expectations for AI infrastructure spending and supported upward revisions to growth forecasts for Korean hardware companies.

"Anything that calls this narrative into question, whether it's soft guidance on capex from hyperscalers, sagging token pricing, Fed tightening fears, we can expect to see a pullback," Wool said. "Expect continued volatility as long as there's uncertainty about how AI hardware spending will play out."

Supporting the bull case, Billy Leung, investment strategist at Global X ETFs, pointed to Korea's corporate-governance reforms and "Value-Up" program, which have helped reduce the "Korea discount" — the tendency of South Korean companies to trade at lower valuations than global peers.

"The KOSPI is in a bull market, but the more important question is whether the rally is being driven by speculation or by a genuine improvement in fundamentals," Leung said. He sees Korea as closer to a fundamentally supported bull market than a speculative bubble, though elevated retail participation, heavy index concentration and ambitious market targets resemble late-cycle behavior.

Retail flows and the won

The rally comes as South Korean retail investors, known locally as "ants," had been shifting money to U.S. markets during the selloff. Retail buying of U.S. stocks hit $4.6 billion in July, according to Korea Securities Depository data, surpassing purchases of domestic shares for the first time since February.

The won jumped 8 percent in July to a nine-month high, its best monthly gain since November 2022, propelled by SK Hynix raising $26.5 billion in a U.S. listing and repatriating part of the proceeds. A stronger won lowers the incentive to bring overseas investments home. The currency traded near 1,419 per dollar, according to Reuters data.

Deposits in domestic stock trading accounts fell to 102.8 trillion won, the lowest since mid-February and down from a record 140 trillion won in early June, according to Korea Financial Investment Association data.

Others cautioned against reading too much into the 20 percent milestone. "I would be cautious about describing this as a completely new bull market," said Jung In Yun of Fibonacci Asset Management Global. The rebound represents both a technical recovery from forced selling and "a genuine return of stability," he said.

His base case is for the broader bull trend to continue, backed by semiconductor earnings and improved risk appetite, but at a slower and bumpier pace. "After such a steep rebound, some consolidation would be healthy, and investors should not expect the market to rise at the same pace from here."

Fundstrat Global Advisors' Mark Newton said the iShares MSCI South Korea ETF has broken above a key technical level on the back of gains in Samsung and SK Hynix, improving the near-term outlook. Memory shares are beginning to outperform the broader tech sector for the first time since June, which Newton described as "a good sign in the short run for Memory within Technology."

Newton remains bullish in the near term, though he cautioned the rally could lose momentum later this month if U.S. Treasury yields and the dollar begin climbing again.

This article is for informational purposes only and does not constitute investment advice.