South Korea's stock market suffered a sharp correction in the third quarter, with the Kospi index falling 18.8% over the period, making it the worst performer among major global stock indices. In early July, core AI memory names including Samsung Electronics and SK Hynix were hit by concentrated selling, and the unwinding of leveraged positions further amplified the decline.

On September 30, the Kospi concluded its third-quarter trading. Despite the nearly 19% quarterly plunge, the index is still up about 60% year-to-date. The earlier substantial gains have also prompted the market to re-examine the valuation levels of South Korean chip stocks and the logic behind AI trades.

Meanwhile, rising global bond yields have further weighed on risk assets, and South Korea's domestic interest rate environment remains tight. According to market participants cited by the Financial Times, the concentrated selling in July has completed one round of valuation reassessment, but cyclical supply risks in the chip industry and the high interest rate environment could still limit the South Korean stock market's future performance.

Concentrated Unwinding in July, AI Memory Trades Reversed

According to reports, this sharp decline began with concentrated selling in early July. Hedge fund Situational Awareness, managed by Leopold Aschenbrenner, had previously built large leveraged positions in South Korean memory chip stocks, and the unwinding of those positions triggered a chain reaction in the market; at the same time, South Korean retail investors held a large number of single-stock leveraged ETFs, which further accelerated deleveraging after the market turned lower.

Samsung Electronics and SK Hynix had been key targets for investors betting on AI infrastructure buildout, with the two companies together accounting for roughly half of the South Korean stock market's total capitalization. Following the July selloff, their forward price-to-earnings ratios have fallen to around 4 to 5 times, and the market has begun to reassess the previously elevated valuations of chip stocks.

Prashant Bhayani, Chief Investment Officer for Asia at BNP Paribas Wealth Management, believes that after the July selloff, South Korean market valuations have become more attractive, but the possibility of another significant valuation expansion is very low. "Reasonable returns may be achievable, but can you still see a 70% gain? Absolutely not," he said.

Joshua Crabb, Head of Asia-Pacific Equities at Robeco, also believes that rising global bond yields will pose a "headwind" for the South Korean stock market. However, he noted that South Korean chip stocks are currently at low single-digit price-to-earnings levels, so the room for further valuation compression is relatively limited.

But low price-to-earnings ratios do not mean earnings risks have disappeared. A report published by S&P Global Market Intelligence in August warned of "cyclical oversupply risks" in the chip industry, which could pressure corporate earnings going forward.

High Interest Rates Exert Pressure, AI Demand Logic Remains Intact

In addition to rising global interest rates, South Korea's domestic monetary policy is also putting pressure on the stock market. Jongmin Shim, Head of Korea Research at CLSA, said that rising bond yields will weigh on stock market performance, and interest rate hikes by the Bank of Korea will further drag on market returns.

However, Shim remains optimistic on the question of whether AI capital expenditure can be sustained. He believes that although hyperscale cloud computing companies have seen significantly higher financing costs and are increasingly reliant on debt financing, competition in the AI space is still driving companies to continue investing. "AI companies have no choice but to keep investing — it's a fight for survival," he said.

From an industry fundamentals perspective, the AI logic behind South Korean chip stocks has not disappeared. Memory chips are a critical component of AI infrastructure, and high-bandwidth memory (HBM) in particular is a key companion product for Nvidia's AI accelerators, with Samsung Electronics and SK Hynix holding important positions in this market. Growing AI demand has also driven up prices for conventional DRAM and NAND memory.

Bhayani views the South Korean stock market as a "proxy" for investors betting on large-scale AI infrastructure spending. This highly concentrated trading structure has amplified both the gains from the AI rally and the drawdown after sentiment reversed.

Therefore, the third-quarter plunge does not mean the AI demand logic behind South Korean chip stocks has reversed. The more direct change is that the previously highly crowded AI memory trade has undergone concentrated unwinding, a valuation reassessment has already occurred, and rising interest rates and chip supply risks have further limited the market's room to continue expanding valuations.