South Korean stocks plummeted on Monday, dropping more than 4% to close at their lowest level since late April. This sell-off was driven by investors retreating from their artificial intelligence-fueled bets, accelerating a downturn that has erased over a quarter of the market's value in just one month.

The sharp pullback in memory chip makers highlighted the market's heavy reliance on SK Hynix Inc and Samsung Electronics Co Ltd. It also exposed growing unease among investors regarding the highly leveraged bets on these two chip giants that had fueled the earlier rally.

The benchmark KOSPI index tumbled 4.5% to finish at 6,516.27 points, marking its lowest close since April 24th. This decline extended its cumulative loss to more than 28% from the record high set on June 22nd. The index has now fallen for four consecutive weeks, sharply erasing the chipmaker-led gains it had accumulated earlier this year.

SK Hynix Inc, a leading global producer of AI memory chips, and its rival Samsung Electronics Co Ltd both closed down more than 4% for the day. These two stocks together account for over half of the weighting in the KOSPI benchmark index.

Once a bystander in the AI frenzy, South Korea has now become one of the world's purest proxies for the global AI trade. This status makes the market particularly vulnerable to shocks, as tens of billions of dollars in margin-financed trades dominate and amplify the extreme volatility.

South Korea's financial regulator announced measures last week aimed at curbing volatility, primarily targeting leveraged ETFs. However, Inki Cho, a senior financial markets strategist at online trading platform Exness, warned that margin loan debt hovering near record highs poses a greater threat.

Cho stated that if SK Hynix or Samsung experiences another significant drop, forced selling triggered by margin calls could overwhelm all the circuit breakers set by the Financial Supervisory Service. He added that while the regulator's measures are a step in the right direction, they are insufficient on their own, and the debt overhang requires a separate policy response.

Retail investors have been hit hard, as easy access through single-stock leveraged funds sparked a borrowing-fueled investment boom. One university student in Seoul reportedly lost nearly 3 billion won of wealth in just four weeks during May.

Over the weekend, Citigroup downgraded its rating on the South Korean stock market from an "overweight" stance held for a year to "tactical neutral." The bank cited heightened volatility rather than a deterioration in fundamentals as the reason for the downgrade.

In other sectors of the KOSPI, shares of Hyundai Motor Co plunged 6% to their lowest level since mid-January after its labor union began a four-hour strike. Its affiliate, Kia Corp, also saw its shares drop by 6.5%.

Market breadth was overwhelmingly negative, with 799 of the 914 stocks traded declining, while only 97 advanced. Foreign investors were net buyers, purchasing 515.3 billion won (approximately $348.36 million) worth of shares.