From "the world's best" to "the world's worst," the Iran war "shot down" the South Korean stock market

From "the world's best" to "the world's worst," the Iran war "shot down" the South Korean stock market

The dual pressures of the Middle East war shock and cooling chip demand are hitting simultaneously, and the once-booming Korean stock market is now facing a severe test.

Since March, the Korea Composite Stock Price Index has fallen by 15%, ranking among the top in declines among major global markets. Overseas funds have continued to flee, approaching historic records, and as of last Friday, the total market value evaporated in Korea this month is about $493 billion.

(The Korea Composite Stock Price Index has fallen more than 15% in March)

The surge in oil prices is suppressing the outlook of Korea’s economy, which relies heavily on energy imports. Meanwhile, doubts are spreading over whether demand for AI-related memory chips can be sustained.

SK Hynix and Samsung Electronics together account for nearly 40% of the Korea Composite Index's weight. These two stocks have been heavily sold by foreign investors, becoming the core of this round of declines.

(The stock prices of Samsung Electronics and SK Hynix have seen a sharp pullback from their annual highs)

Energy Fuse

The rise in oil prices triggered by tensions in the Middle East is the direct fuse for this round of declines in Korean stocks.

Matthew Haupt, portfolio manager at Sydney’s Wilson Asset Management, said:

I’m currently staying away from Korean stocks because facing headwinds from both war and memory chips is hard enough—dealing with both at the same time is almost impossible. We are entering a more uncertain environment, with a certain degree of crowded trades on the market, and operational risk on the Korean stock market has significantly increased.

Korea depends on the Middle East for over 70% of its crude oil imports, exposing it heavily to oil price shocks. The authorities have begun studying expanded driving restrictions, reflecting real concerns over rising energy costs.

Meanwhile, high energy prices also raise the risk of inflation rebounding and tighter monetary policy. Marvin Chen, Bloomberg Industry Research strategist, noted:

The market has not yet fully priced in the risks of war. If oil prices remain high, corporate earnings momentum may weaken further.

The sharp market swings have further created an unusual trading environment. Korea’s stock market circuit breaker mechanism triggers trading halts when the index falls by 8% in a single day, and this mechanism has been activated twice this month—one quarter of all circuit breaker events since 2000.

This year, the "auxiliary mechanism" has been triggered 10 times. This mechanism is activated when Korea Composite Index futures fluctuate more than 5% in a single day; for comparison, it was only triggered three times in all of 2025.

Matthew Haupt believes that the frequent trading halts indicate the presence of a lot of "unstable capital," making trading much more difficult.

Chip Demand Outlook Clouds, Some Investors Sit on the Sidelines

Meanwhile, doubts about the sustainability of AI investment are eroding the market’s optimism regarding demand for memory chips.

Google’s recently disclosed TurboQuant technology can significantly improve AI operating efficiency, causing the market to question the future scale of demand for high-end chips.

According to a Goldman Sachs report, the recent foreign capital outflows have been mainly driven by large-scale selling of SK Hynix and Samsung Electronics, and the proportion of foreign shareholding in both companies is now at its lowest since 2022.

Despite the setback, the Korea Composite Stock Price Index is still up about 25% so far this year, with previous strong gains providing a certain buffer for the index.

Some investors remain optimistic about the long-term prospects for Korean stocks, citing robust demand for core storage products such as High Bandwidth Memory (HBM), strong growth in chip exports, and continuing corporate governance reforms.

But for now, many investors are choosing to wait, hoping for greater clarity on how the Middle East conflict will impact supply chains.

Gerald Gan, chief investment officer at Reed Capital Partners, said:

If the conflict lasts another month or two, I might keep waiting, maybe until the end of the year or the start of next year before re-evaluating Korean stocks.

He added that he currently prefers holding cash and increasing gold allocation.

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