South Korea had been a poster child for the global AI trade for most of this year. But by almost every measure, the $4.3 trillion stock market is rapidly losing its appeal to investors.

Trading volumes in South Korean equities have plunged 70% from their peak in late May, foreign investors are withdrawing at the fastest pace in Asia, and local retail investors are also gradually stepping back. In the first half, the KOSPI was the best-performing major index globally, but it has since fallen 22%, making it one of the worst performers in the second half. Meanwhile, U.S. stocks keep hitting new highs.

Behind this reversal is the market's over-reliance on the AI theme through just two memory chip giants: Samsung Electronics and SK Hynix. They sit at the core of the global AI supply chain, but that concentration is now becoming a burden. As investors question the sustainability of the memory chip boom, and after a brutal selloff this summer triggered by highly leveraged trades left some global funds wary of returning to the Korean market, the appeal of South Korean stocks has faded further.

Phillip Wool, head of portfolio management at Rayliant Global Advisors, said: "For most investors, especially those who entered the Korean market recently for the memory chip trade, the biggest challenge is that the easy money from this theme has largely been made." He added that the fund has been taking profits on Korean AI stocks and currently holds both memory giants below benchmark weight.

Samsung Electronics and SK Hynix together account for more than half of the KOSPI's weighting and were the main drivers of the Korean market's rally earlier this year.