Kospi Plunges 4.2% as Tech Stocks Crumble on AI Valuation Fears

South Korea's Kospi index fell more than 4% on Thursday, driven by a tech-heavy selloff following a sharp decline in U.S. markets. The drop came amid ongoing concerns about overvaluation in artificial intelligence-related stocks, with major technology companies suffering significant losses. The selloff intensified after Nvidia, the dominant chipmaker in the AI sector, failed to sustain its post-earnings rally.

The benchmark Kospi opened as much as 4.2% lower, with key tech stocks like Samsung Electronics and SK Hynix falling sharply. Samsung's shares dropped nearly 5.2%, while SK Hynix fell more than 10%. The broader market weakness extended to Japan's Nikkei 225, which lost 2.2% in early trading.

The selloff followed a dramatic reversal in U.S. markets, where the S&P 500 fell to its lowest level in more than two months. Despite strong quarterly earnings from Nvidia, the stock dropped nearly 3.2% in after-hours trading, signaling investor caution. The Philadelphia Semiconductor Index also declined sharply, dragging down Asian semiconductor stocks immediately after market open.

Risks to the Outlook

Investor sentiment remains fragile as concerns about AI-driven valuations persist. While Nvidia's earnings initially buoyed Asian markets, the selloff highlighted the fragility of the rally. The stock had surged earlier in the week after reporting record profits and issuing an optimistic revenue forecast. However, the subsequent decline reflected skepticism about whether AI demand can sustain such high valuations.

The Kospi's sharp drop underscores the volatility of tech-heavy markets, particularly those with close ties to the U.S. equity market. South Korean stocks, including SK Hynix and Samsung, were especially vulnerable due to their exposure to global AI trends and their role as suppliers to U.S. chipmakers. Meanwhile, Japanese and Chinese markets also saw modest declines, with Hong Kong's Hang Seng and Shanghai Composite indexes posting minimal gains.

What This Means for Investors

The selloff has raised concerns about a potential correction in the AI sector, especially as hedge funds begin to take action. Goldman Sachs estimated that trend-following hedge funds could sell up to $40 billion in global equities in the coming week after the S&P 500 fell below a key threshold. If market volatility continues, further selling could push the index into a deeper correction, with systematic hedge funds likely to increase short positions.

For South Korean investors, the drop in the Kospi highlights the challenges of relying on tech-driven growth in the face of global market shifts. The country's semiconductor sector, a key component of its economy, faces additional headwinds from foreign investor sentiment and shifting demand for AI-related products. The recent plunge in Kioxia Holdings, a major NAND flash provider, further illustrates the risks of overvaluation in the sector.

Policy and Market Reactions

Authorities in South Korea have also taken notice of the market turmoil. The Ministry of Strategy and Finance has discussed measures to stabilize the exchange rate and prevent further capital outflows. Deputy Prime Minister Koo Yoon-chul emphasized collaboration with the National Pension Service and exporters to manage currency volatility. These efforts reflect broader concerns about how a weak won could impact the country's financial stability as reported by the Korea Herald.

In the bond market, foreign investors have intensified their selling of government futures, contributing to rising interest rates. The 3-year treasury bond yield climbed to 2.944%, signaling a shift in investor risk appetite. Analysts warn that increased bank bond issuance could lead to a cycle of rising rates and currency depreciation, further pressuring liquidity in the financial sector.

The Kospi's sharp drop is not the only sign of market instability. As hedge funds and institutional investors reassess exposure to AI and tech stocks, the broader equity market remains vulnerable to further swings. The coming days will test whether investor confidence can be restored or if the selloff will deepen into a broader correction.