South Korean stock market rises 22% in 10 days, entering a technical bull market—Is the AI chip rally making a strong comeback?

South Korea's benchmark KOSPI index rose 3.6% on Thursday, rebounding about 22% from its July 30 low, officially entering a technical bull market. Samsung Electronics and SK Hynix have been the main drivers of this rally, with both heavyweight chip stocks posting single-day gains close to or exceeding 5%.

This rebound comes after extreme turbulence. KOSPI plunged 22% in July, marking its worst monthly performance since the global financial crisis. At that time, leveraged chip positions were forcibly liquidated, triggering cascading trading halts and causing a significant shrinkage in retail investors' wealth.

Multiple favorable factors fueled this recovery: the latest earnings reports from global tech giants show AI capital expenditures remain high; mild US inflation data has eased market concerns over Fed rate hikes; regulators have tightened single-stock leveraged ETF rules; and markets expect Samsung and SK Hynix to soon announce shareholder return plans.

From Plunge to Bull Market: A Dramatic Reversal in One Month

Just a month ago, the Korean stock market was mired in difficulty. KOSPI fell 22% in July alone, its worst monthly performance since the global financial crisis.

The trigger for the plunge was forced liquidation of leveraged positions. Retail investors held substantial positions in single-stock leveraged ETFs linked to chip stocks, and when the market reversed, cascading liquidations led to intraday swings exceeding 5% frequently. The exchange triggered multiple trading halts, and tens of billions of dollars of retail wealth evaporated in a short time.

Regulators intervened promptly. Authorities tightened minimum margin requirements for single-stock leveraged ETFs, leading to a sharp decline in daily turnover for related products. At the same time, investors actively reduced leverage, bringing volatility to its lowest level since April.

Kang DaeKwun, CEO of Life Asset Management, said, "I believe the market overshot during the forced liquidation of leveraged positions. As capital flows stabilize, the current rebound is a natural correction."

AI Spending Remains Robust, Supporting Logic for Chip Demand Still Valid

The fundamental support for this rally comes from consistently strong demand on the AI front.

Latest earnings reports from global tech giants reveal no slowdown in investment in AI infrastructure, directly boosting expectations for demand for AI chips such as high-bandwidth memory (HBM). The Korean stock market has risen over 60% so far this year, mainly driven by retail investors. Yet even so, KOSPI remains about 25% below the late-June high.

Qian Zhang, emerging markets equity specialist at Baillie Gifford, pointed out, “Memory demand has exploded due to the rise of AI agents and physical AI, but supply capacity was very limited as we entered this stage—this is the bottleneck.” “We're not saying the world will always build data centers at this pace, but it’s a real physical constraint, and only a handful of global companies can address it.”

The rising threat of Chinese competition once doused the strong rally in memory stocks, but analysts believe the short-term outlook for demand remains solid. As AI penetrates more application scenarios and usage frequency in everyday life increases, chip demand continues to be driven higher.

Shareholder Return Expectations Heat Up; Massive Plans from Samsung and SK Hynix Expected

Aside from the AI narrative, the pending shareholder return plans from the two chip giants have also become an important catalyst for market sentiment recently.

Samsung Electronics stated during its Q2 earnings call that “the board and management are actively discussing specific execution plans—including special dividends—and the next shareholder return policy.” Its current three-year policy for 2024–2026 will end this year.

According to estimates from DS Investment Securities, Samsung Electronics' free cash flow (FCF) is expected to reach KRW 263.2 trillion this year. After regular dividends are deducted, about KRW 131.8 trillion of additional return room is available based on 50% of cumulative three-year FCF. KB Securities predicts Samsung’s annual shareholder returns could be between a minimum of KRW 100 trillion and a maximum of KRW 200 trillion—expanding more than 10 times compared to the current level of KRW 9.8 trillion per year.

SK Hynix has announced it is "actively reviewing additional shareholder return plans, with details to be determined and announced within Q3." Mirae Asset Securities expects SK Hynix’s FCF to reach KRW 180 trillion this year, with year-end net cash at KRW 173 trillion and an estimated amount of around KRW 40 trillion available for returns. Daishin Securities believes that, if share buybacks and special dividends are combined, the maximum return space could be KRW 100 trillion.

Kim Young-gun, a researcher at Mirae Asset Securities, noted that Samsung Electronics’ “stock price has fallen 39% from its peak, making this a stage where legitimacy, yield, and perceived effectiveness of shareholder returns are significantly enhanced.” He also said that SK Hynix’s “stock price is down 51% from its peak; this is the best timing for buybacks and other return measures, and the larger the return, the more the market will see it as a sign of the company’s confidence in future cash-generating ability.”

Foreign Investors’ Subtle Attitude; Market Sustainability Still Uncertain

Movements of foreign capital are noteworthy. On Thursday, foreign investors were net buyers of Korean stocks, but year to date they remain net sellers, having withdrawn over $100 billion—previous overvaluation and market overheating were the main reasons. With this downturn making valuations more attractive, some overseas funds have started to return.

However, whether the market can sustain its rally remains uncertain. Kang DaeKwun remarked, “Unless there’s a certain degree of stability in the AI narrative and US interest rates, it will be difficult for the market to keep rising continuously.”