The shockwaves from the Iran conflict are severely impacting the South Korean stock market, revealing the fragility of a rally primarily driven by a handful of growth stocks. Bullish sentiment towards South Korean equities is rapidly fading.
Prior to the outbreak of war in the Middle East, the South Korean stock market was among the world's top performers. Now, with soaring oil prices damaging the outlook for this energy-dependent economy, South Korean stocks are facing heavy selling pressure. Concurrently, optimism regarding demand for memory chips is starting to wane, putting pressure on two major index heavyweights: SK Hynix and Samsung Electronics.
The Korea Kospi Index has fallen nearly 17% this month, ranking as the worst performer among 92 major global indices tracked by Bloomberg. As of Monday, the market capitalization of South Korean stocks has evaporated by $739 billion this month, heading for a record net outflow of foreign capital.
"I wouldn't touch Korean stocks right now because they are facing headwinds from both the Iran war and memory chips," said Matthew Haupt, a portfolio manager at Wilson Asset Management in Sydney. "The outcome is becoming more uncertain, which makes trading the Korean market very risky due to already crowded positioning."
On Tuesday, the Kospi index plunged as much as 4.1% before paring losses to 1.6%. The index is moving closer to breaching the 5,000-point level, a threshold previously supported by President Lee Jae-myung, highlighting the swift shift in market sentiment.
For investors, the most challenging aspect is the market's extreme volatility, with sharp declines followed by significant rebounds, frequently triggering trading halts.
The Kospi's circuit-breaker mechanism, which pauses trading after an 8% drop, has been triggered twice this month alone, accounting for a quarter of all such incidents since 2000. Meanwhile, the "sidecar" mechanism, activated when Kospi stock index futures fluctuate by 5% or more, has been triggered 10 times this year, compared to just three times in the entirety of 2025.
Haupt noted that the multiple trading halts in recent weeks indicate "a large amount of fast money in the market, which makes trading difficult."