Middle East turmoil hits "the best-performing stock market of the year": South Korean stocks see the biggest single-day drop in 18 months, Samsung and SK Hynix shares plunge about 10%.

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South Korea's stock market cooled rapidly from "the world's strongest" in just one trading day. Driven by a combination of factors, including rising oil prices due to Middle East tensions and decreased global risk appetite, the Kospi index—previously a year-to-date leader—suffered concentrated profit-taking, with declines in heavyweight stocks amplifying the slump.

After briefly avoiding overseas sell-offs due to closure on Monday for a public holiday, the South Korean stock market opened on Tuesday with a sharp drop. The Kospi index corrected more than 7% that day, triggering a circuit breaker during the session, with regulators temporarily suspending algorithmic trading.

Two major heavyweight stocks became the focus of the sell-off. Samsung and SK Hynix shares fell by 9.88% and 11.5% respectively, dragging the overall market down to its largest single-day drop since volatility caused by sudden unwinding of yen carry trades in August 2024.

Risk aversion was also reflected in the currency and commodity markets. The Korean won fell 1.34% against the US dollar, with the dollar buoyed by safe-haven buying; meanwhile, oil prices surged after US and Israel strikes against Iran on Saturday, exerting direct pressure on South Korea—which relies heavily on Middle Eastern crude—and accelerating the market’s repricing of previously overheated trends.

Concentrated Profit-taking Explodes, Year-to-Date Gains Drop from 50% to 37%

The sharp decline came after South Korea’s stock market had been running high. As the world’s best-performing stock index in 2026, the Kospi’s year-to-date gains reached 50% before the end of February, but had shrunk to 37% after Tuesday’s drop.

Even with the steep fall, South Korea’s market still offered significant long-term returns, with a 128% gain over the past 12 months. However, trading activity last week already showed heightened speculative sentiment among retail investors, planting the seeds for Tuesday’s concentrated reversal.

Fund flows revealed that overseas investors had begun to reduce exposure before the drop. Data from the Korea Exchange disclosed that on the last trading day in February, net outflows from international investors reached 7 trillion won (about $4.7 billion).

Foreign capital continued to sell on Tuesday. According to Bloomberg and Chosun Biz data, international investors had another net sell-off of 5.4 trillion won that day. The foreign selling and the rapid index retreat reinforced each other, becoming major drivers of the day's volatility.

Oil Prices and the Won Move Together, South Korea’s “Middle East Dependence” Repriced

The market’s decline was not driven solely by internal stock market factors. The weakening won reflected increased overall risk aversion, emerging market currencies came under pressure, and funds flowed towards the dollar and other safe-haven assets.

Rising oil prices had a more targeted impact on Korea. Oil prices rose after US and Israeli strikes on Iran Saturday, with South Korea being one of the world's largest oil importers, needing about 2.7 million barrels daily, about 70% of which comes from the Middle East.

As the overall market plunged, themes related to geopolitical risks were chased in the Korean stock market. Shipping companies like Korea Line and STX Green Logis, defense stocks such as Hanwha Systems and Lig Nex1, and energy-related Daesung Energy all saw strong share price rises.

This structural differentiation shows that funds did not exit entirely, but quickly shifted in an environment of rising uncertainty towards trades more driven by geopolitical events.

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