- The Kospi fell 5.4% Wednesday, pushing it into a technical bear market at 20% below last month’s all-time high — an extraordinary reversal for an index that was up 116% year-to-date at its peak and was the world’s best-performing major benchmark in 2026; SK Hynix slid 5.7% and Samsung Electronics dropped 6.3%, despite Samsung reporting a 19-fold surge in quarterly profit earlier this week, highlighting that investors are repricing the AI capex cycle rather than reacting to fundamentals.
- The move was catalyzed by reports that China’s DeepSeek is developing its own AI chip and that Zhipu is considering designing its own chip due to surging demand and US export controls — developments that signal Chinese AI labs are moving toward domestic compute independence, which investors interpreted as reducing the monopoly position of Korean memory chipmakers in the AI supply chain and as a positive for Chinese tech stocks.
- Chinese tech captured the rotation: Alibaba surged more than 13% in Hong Kong and Tencent rose over 4%, helping Hang Seng China Enterprises Index climb as much as 4.5% — its biggest advance since April 2025 — as investors noted that Chinese tech valuations remain deeply depressed relative to history, with the Hang Seng China Enterprises Index trading at 8.9x forward earnings versus MSCI Asia’s 13x, and Tencent trading at its all-time low valuation of 11x forward earnings.
- Structural vulnerabilities amplified the Kospi selloff: foreign investors have dumped more than $100 billion of Korean shares this year, Korea’s momentum-driven retail traders have filled the void and added volatility, leveraged ETFs magnify moves in both directions, and the Kospi’s extreme concentration in chipmakers — which drove the 116% rally — leaves it disproportionately exposed when the AI sentiment narrative shifts, even though Kospi is still up ~72% year-to-date at current levels.
What Happened?
The AI rotation trade that has been building for weeks accelerated sharply on Wednesday. Investors pulled money from Korean and Taiwanese chipmakers — the primary beneficiaries of the AI memory and GPU spending boom — and rotated into Chinese technology stocks that have been out of favor for most of 2026. The Kospi dropped 5.4%, pushing it 20% below its June all-time high and into technical bear market territory. At the same time, the Hang Seng China Enterprises Index rose as much as 4.5%, with Alibaba jumping 13% and Tencent rising 4%. The immediate catalyst was a Reuters report that DeepSeek is developing its own AI chip, which investors read as a signal that Chinese AI demand will increasingly flow to domestic chipmakers rather than Korean memory producers.
Why It Matters?
The Kospi’s implosion from world-best to world-worst performer in a matter of weeks illustrates how concentrated the 2026 AI trade had become — and how quickly sentiment can reverse when the narrative shifts. Samsung Electronics posted a 19-fold increase in quarterly profit, yet its stock fell 6.3% on the same day, because investors are not selling on earnings but on the question of whether AI capex can sustain at the pace that justified the valuations. As Fidelity’s Ian Samson noted, roughly $1 trillion in AI chip spending is controlled by a handful of hyperscaler companies — and if any of them slow spending, the impact on Korean memory chipmakers would be severe. The China rotation story is equally important: Alibaba and Tencent at single-digit or low-double-digit forward P/E multiples represent some of the cheapest exposure to global AI demand growth available, and that value gap is now attracting capital.
What’s Next?
Watch whether this is a sustained rotation or a sentiment overshoot that reverses — Kospi is still up ~72% year-to-date, so it retains enormous gains even in bear market territory from the peak. The critical variable is the next round of hyperscaler earnings and capex guidance: if Microsoft, Google, Amazon, and Meta signal any moderation in AI infrastructure spending, Korean chipmakers face further downside. DeepSeek’s chip development timeline will also matter — if Chinese labs develop credible domestic compute alternatives, the TAM for Korean memory in the AI buildout genuinely shrinks. For Chinese tech, the next catalyst is Alibaba’s full earnings release and any concrete signal of domestic AI demand recovering — the current re-rating is valuation-driven, but a fundamental earnings recovery is needed to sustain it.
Source: Bloomberg
