South Korean equities experienced a sharp decline as escalating Middle East tensions fueled concerns over rising energy costs and a global flight to safety. Foreign investors offloaded more than $3 billion worth of Korean stocks.

Upon returning from a holiday, the benchmark Kospi index plunged 7.2%, marking its worst single-day performance since August 2024. Chip giants Samsung Electronics and SK Hynix each fell by at least 9.9%, serving as the primary drag on the index.

A prolonged conflict would pose a significant challenge to the Korean stock market's recent global-leading rally—the Kospi remains up 37% year-to-date. Earlier, surging global demand for memory chips, driven by the AI boom, had propelled the index, with Samsung and SK Hynix contributing to most of the gains. Tuesday's steep drop erased approximately $170 billion in combined market value from the two firms, alarming investors who had chased the rally betting on its continuation.

Jung In Yun, Global CEO of Fibonacci Asset Management, commented: "If the Iran conflict persists, it could keep crude oil prices elevated, heighten inflationary risks, and complicate the Federal Reserve's interest rate cut trajectory. This macroeconomic environment is weighing on AI-related stocks, which carry high valuations and are increasingly sensitive to shifts in interest rate and liquidity expectations."

On Tuesday, airline and automotive stocks also weakened, while oil-related shares showed relative resilience. Defense stocks such as Hanwha Aerospace and LIG Nex1 surged over 19%.

Volatility in Kospi futures briefly triggered a halt in program trading to curb swings. The South Korean equity market became the worst performer in the region, with the MSCI Asia Pacific Index falling as much as 3%, its largest drop since April of last year.

**Retail Investors Step In**

According to data from the Korea Exchange, foreign investors were the main source of selling pressure in the Seoul market, net selling 5.4 trillion won (approximately $37 billion) of Koppi constituent stocks.

Retail investors purchased a similar magnitude of stocks, continuing a recent pattern that indicates individual investors are using their previously accumulated record cash reserves to buy on the dip.

Cameron Chui, Equity Strategist at J.P. Morgan Private Bank, stated: "After the strong rally in Korean equities this year, some profit-taking is to be expected. As long as the escalation of the Iran conflict remains contained, this pullback presents a buying opportunity."