The essence of the decline in South Korean stocks is not that the memory chip cycle has peaked, but that global capital is repricing the risk-reward profile of the “AI trade.”

Many people simply attribute the sharp decline in South Korean stocks to a “semiconductor pullback,” but I believe we need to look one level deeper.

Richard Tang, head of research at Julius Baer, put it bluntly: “We are seeing more and more capital flow back into U.S. equities, exacerbating the continued outflow of foreign capital from the South Korean market.” Foreign investors have withdrawn $131 billion from South Korean stocks this year, the largest amount among major Asian markets. This is not merely profit-taking; it looks more like global funds are reassessing the “investability” of the South Korean market.

Chris Wood, strategist at Jefferies, drew a thought-provoking comparison in his latest quarterly report: The current AI boom bears structural similarities to the 2008 subprime crisis—mega-scale cloud providers are extending huge amounts of “unsecured credit” to consistently loss-making AI labs. Whether this analogy is entirely appropriate is debatable, but it reflects a real market concern: the core assumptions underlying the AI trade are being reexamined.

JPMorgan data shows that foreign selling is essentially “forced deleveraging under size constraints,” rather than an active bearish view. But forced deleveraging itself can create a negative feedback loop: falling prices trigger more stop-losses, more stop-losses push prices lower, further constraining the room foreign investors have for their positions.

From a technical perspective, the won-dollar exchange rate has risen to its highest level since October 2024. The combination of currency depreciation and a stock market decline means foreign investors holding South Korean stocks are facing a “double whammy.” Foreign investors’ willingness to return will remain weak until the exchange rate stabilizes.

The South Korean Finance Ministry’s statement deserves attention—Bank of Korea Governor Shin Hyun-song said that strong chip demand is supporting economic growth beyond expectations, but financial stability risks still need to be monitored, and the timing of further rate hikes depends on the data. If the Bank of Korea continues raising rates amid inflationary pressures, valuation pressure on the stock market will intensify further.

I will not buy the dip just yet. We need to see two signals: first, an easing of tensions in the Middle East or a clear downward trend in U.S. Treasury yields; second, stabilization of the won exchange rate. Until these two conditions are met, staying on the sidelines is the more rational choice.#每周来晒