South Korea’s stock market approaches a technical bear market, regulators convene emergency meeting: excessive concentration in the semiconductor sector intensifies market volatility.

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The Korean stock market is facing its most severe test of the year. The benchmark index KOSPI has seen its decline from the historical high touch 20% at one point, approaching the threshold of a technical bear market. At the same time, regulators held an emergency meeting, warning that the excessive concentration of the semiconductor sector has become the core risk amplifying market volatility.

According to Reuters, South Korea’s Finance Minister Choo Kyung-ho convened a meeting with the central bank governor and the heads of various financial regulatory agencies on Wednesday. The post-meeting statement said that profit-taking and portfolio rebalancing by foreign and institutional investors, as well as the shift in expectations for the global AI sector, have collectively increased market volatility. The statement explicitly pointed out the issue of concentration in the semiconductor sector, saying “the rising concentration in the semiconductor sector is driving market volatility, and fluctuations in the chip sector are intensifying the impact on the overall stock market.”

KOSPI plunged as much as 5.7% during Wednesday’s trading session, hitting its lowest level since May 20, before recovering part of its loss on a rebound in chip stocks, still down about 15.6% from the record high set on June 22. SK Hynix dropped up to 5% during the session, and Samsung Electronics declined as much as 6.9%. Notably, Samsung Electronics had just announced its quarterly profit surged 19-fold year-over-year earlier this week, but its stock remained under pressure, reflecting that market doubts about the sustainability of AI investment have outweighed positive fundamentals.

From Strongest of the Year to Nearing Bear Market

Earlier this year, the Korean stock market was among the best-performing markets globally. KOSPI had risen about 116% from the beginning of the year to its historical high on June 22, and its year-to-date gain still stands at around 73%, remaining among the leading major benchmark indices globally.

However, this rally heavily depends on the two chip giants, Samsung Electronics and SK Hynix, making the market especially vulnerable when AI sentiment reverses. Over the past few weeks, KOSPI has been swinging violently as investors react to every piece of AI industry news, with the market trying to assess whether this rally can continue.

Ian Samson, portfolio manager at Fidelity International, commented, "A lot of volatility stems from uncertainty about the fundamentals. We do see strong semiconductor demand driven by AI, but this is largely dependent on the roughly one trillion dollars of capital expenditure by a handful of large tech companies." If this scale of chip spending proves unsustainable, downside risks will emerge.

Leveraged ETFs as Volatility Amplifiers

Regulators’ concerns are not limited to the semiconductor sector itself, but also focus on the fast-growing single-stock leveraged ETF products.

On Tuesday, the Financial Supervisory Service of Korea said it will monitor the impact of single-stock leveraged ETFs tied to chip stocks, and review asset management companies’ marketing practices if necessary. The Bank of Korea issued a warning Sunday, saying single-stock leveraged ETFs may amplify directional trading, increase concentration in specific stocks, and heighten market volatility, and said it will coordinate with relevant agencies to address associated risks.

According to Bloomberg, leveraged ETFs magnify fluctuations in both directions and have become one of the key drivers of this round of violent KOSPI swings.

Frequent Circuit Breakers, Heightened Regulatory Pressure

The severity of market volatility has left its mark on institutional mechanisms. Earlier this week, KOSPI triggered another circuit breaker, the sixth time this year and the twelfth in Korea’s stock market history, spurred by sharp swings in heavyweight chip stocks like Samsung Electronics and SK Hynix.

With rising market risks, Korea’s regulatory response is steadily intensifying. From the central bank’s risk coordination statement, to the Financial Supervisory Service’s ETF monitoring promise, and the finance minister’s cross-agency meeting, a series of intensive remarks indicate that authorities are treating this round of volatility as a financial stability issue requiring a systemic response, not just a normal market adjustment.

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