The South Korean stock market, once a global standout, is now facing a severe test as pressures from Middle East conflict and cooling demand for semiconductors converge. Since March, the Korea Composite Stock Price Index (KOSPI) has fallen by 15%, ranking it among the worst-performing major global markets. Foreign capital continues to exit, with the scale of outflows approaching historic records. As of last Friday, the market's total capitalization had evaporated by approximately $493 billion this month. The surge in oil prices is dampening the economic outlook for South Korea, which is highly dependent on energy imports. Concurrently, doubts are spreading regarding the sustainability of demand for AI-related memory chips. SK Hynix and Samsung Electronics together account for nearly 40% of the KOSPI's weighting. These two stocks have been heavily sold by foreign investors, forming the core of the current downturn.

Energy as the Trigger

Rising oil prices, driven by tensions in the Middle East, served as the immediate trigger for this decline in South Korean equities. Matthew Haupt, a portfolio manager at Wilson Asset Management in Sydney, commented:

"I am currently avoiding Korean stocks due to facing two headwinds simultaneously: war and memory chips. Managing one major challenge is difficult enough; coping with both erupting at once is exceptionally tough. We are entering a more uncertain environment, and coupled with a degree of crowded trading, the operational risks in the Korean market have increased significantly."

South Korea relies on the Middle East for over 70% of its crude oil imports, making it highly exposed to oil price shocks. Authorities have begun studying measures to expand driving restrictions, reflecting tangible concerns over rising energy costs. Furthermore, high energy prices elevate the risks of rebounding inflation and tighter monetary policy. Marvin Chen, a strategist at Bloomberg Intelligence, noted:

"The market has not yet fully priced in the war risk. If oil prices remain persistently high, corporate earnings momentum could weaken further."

Significant market volatility has created an unusually challenging trading environment. South Korea's market circuit breaker, which halts trading if the index falls 8% in a single day, has been triggered twice this month. This accounts for a quarter of all such trading halts since the year 2000. Additionally, the "sidecar" mechanism, which is activated when KOSPI futures fluctuate more than 5% in a day, has been triggered 10 times this year. In contrast, it was triggered only three times in the entirety of 2025. Matthew Haupt believes the frequent trading halts indicate the presence of substantial "unstable capital" in the market, significantly increasing trading difficulty.

Clouded Chip Demand Prospects Lead Some Investors to Adopt Wait-and-See Stance

Simultaneously, doubts about the sustainability of AI investment are eroding optimistic expectations for memory chip demand. Google's recent unveiling of its TurboQuant technology, which can significantly improve AI operational efficiency, has led the market to question the future scale of demand for high-end chips. According to a Goldman Sachs report, recent foreign outflows have been primarily driven by large-scale selling of SK Hynix and Samsung Electronics. The foreign ownership ratio in these two companies has now fallen to its lowest level since 2022. Despite the sharp decline, the KOSPI remains up approximately 25% year-to-date, with its previous strong gains providing some buffer. Some investors maintain an optimistic long-term view on South Korean stocks, citing reasons such as solid demand for core memory products like High Bandwidth Memory (HBM), strong growth in chip exports, and ongoing corporate governance reforms. For the present moment, however, many investors are choosing to stay on the sidelines, waiting for a clearer picture of how the Middle East conflict will impact supply chains. Gerald Gan, Chief Investment Officer at Reed Capital Partners, stated:

"If the conflict continues for another month or two, I will likely continue waiting. I probably won't re-evaluate Korean stocks until at least the end of this year or early next year."

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