South Korean Stocks Plunge 4% as AI Profit-Taking Intensifies

The benchmark Kospi Index dropped between 4% and 5.5% on Monday, August 3, 2026, as global and institutional investors sold more than 1 trillion won in stocks. This downturn reversed gains from a record one-day rally the previous Friday and follows a volatile July in which the index plunged 22%, its worst monthly performance since 2008. Semiconductor heavyweights Samsung Electronics and SK Hynix led the decline, with shares falling between 6% and 9% despite reporting record quarterly earnings.

Market instability centered on the collapse of single-stock leveraged ETFs and forced selling by hedge funds. Retail investors lost an estimated $38.7 billion as assets in ETFs tracking chipmakers plummeted from $50 billion in June to $17 billion by late July. This crisis prompted Finance Minister Koo Yun-cheol to issue a public apology for insufficient oversight, while authorities temporarily halted new listings of these ETFs in mid-July. Citadel LLC acquired the bulk of the equity book from the failing hedge fund Situational Awareness, whose forced liquidations had aggravated the market slide.

Despite the immediate sell-off and concerns over AI valuations and Chinese advancements, some institutional sentiment remains positive. Morgan Stanley upgraded Korean stocks to overweight with a Kospi target of 9,000, suggesting the market is past the midpoint of unwinding retail margin and hedge fund leverage. The broader Asian region saw mixed results, with Japan's Nikkei 225 falling while Chinese markets remained resilient following a new AI model release from Alibaba Group.