South Korean stocks have soared in the past few months, with the KOSPI Index doubling this year, helped by the strong performance of Samsung and SK Hynix. It peaked at 9,388 this month and then pulled back to the current 8,410. Still, there is a risk that the index will retreat sharply once the ongoing AI-fueled growth ends.
Top reasons why the Kospi Index is at risk
The blue-chip Kospi Composite Index has been in a strong upward trend this year, helped by the robust gains by companies like Samsung and SK Hynix, which are top leaders in the memory industry.
The two companies have surged because of the ongoing AI boom that has pushed memory prices much higher. As a result, their market capitalization has crossed the $1 trillion milestone this year.
The recent Micron earnings showed that the memory industry was doing well this year. Its revenue more than tripled, while its gross margin jumped to over 80%. The management expects that the revenue will soar to over $50 billion this quarter.
These numbers mean that Samsung and SK Hynix will experience a similar growth in the near term. This explains why the latter is now planning to raise $30 billion by listing in the United States.
Still, the main risk for the Kospi Composite Index is that these two companies account for over 50%. As such, it will continue doing well as long as the memory boom is accelerating. On the other hand, signs that the memory boom is ending will lead to a strong reversal.
There is also a risk that the Kospi Index surge is showing bubble-like behaviors as many South Korean retail investors pile in. Indeed, most people in Seoul and other cities are constantly talking about the booming stock market.
That has led to the Fear of Missing Out (FOMO), with many traders taking huge loans to take part in the boom. Data shows that retail investors hit a borrowing limit earlier this month, with many of them borrowing over $11 billion to pump the market.
On the other hand, foreign investors have started selling their South Korean stocks. They sold over 129 million shares recently, a sign that they expect the rally to halt.
Another potential macro risk is that the US and Iran have intensified their attacks at the Strait of Hormuz, risking a resumption of the war. Such a move will lead to higher crude oil prices, which will affect South Korea, a country that depends on energy imports.
Kospi Composite Index has formed a bearish divergence
Kospi Index chart | Source: TradingView
Technicals are sending bearish signals, with the MACD indicator forming a bearish divergence. This pattern happens when the indicator is forming a series of lower lows and lower highs when an asset is in an uptrend.
The same is happening with the Relative Strength Index (RSI), which has slowly dropped from the overbought level of 83 to the current 52.
KOSPI has also formed a double-top-like pattern. Therefore, there is a risk that it will resume the downward trend in the coming weeks, potentially to the key support at 7,000.
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