The fall of the Kospi index has permanently altered the lives, and economics, of millions of South Koreans | Photo Credit: KIM SOO-HYEON

A 44-per cent correction in South Korea’s benchmark Kospi index, over 50 per cent of which was made up by just 2 AI semiconductor stocks — Samsung and SK Hynix — from its peak of 9,386 on June 19 to a low of 5,263 on July 29, has permanently altered the lives, and economics, of millions of South Koreans. While India has so far managed well, given the lack of an AI bubble here and superior regulation, it is now time for investors and regulators to be on extra guard. The ramifications for financial flows and stability need to be reckoned with as well.

That the financials of AI were in ‘Jenga’ mode is well known. Even before the correction took a harsh turn in the second half of July, per a Goldman Sachs report, as of July 13 over 1.2 million leveraged retail trading accounts in South Korea had triggered margin calls. Apparently, this represented around 3.4 per cent of the adult population in South Korea. The numbers would have been higher by end of the month. Such was the meltdown that the finance minister of the country had to apologise for giving green light for launch of speculative products like single-stock leveraged ETFs that amplify returns on the upside and downside. While darling semiconductor stock SK Hynix fell by around 50 per cent between June 19 and July 30, the single-stock leveraged ETF indexed to it plunged over 80 per cent.

For now, the issue appears to have been contained, notwithstanding the spectacular blow up of a multi-billion-dollar AI theme focused US hedge fund — Situational Awareness. But global investors and regulators should be alert to concentration risk at various levels. For one, the AI theme has now become too big to fail. The US Big Techs and AI companies are estimated to invest over a trillion dollars in capex in CY26, much of it in the US and the trend is expected to continue for next few years. Two, the wealth effect of stock market boom there, driven by the AI stocks too, has been a big support in driving the K-shaped economy where consumption has been driven just by the top half of the population. Three, within the stock market boom and wealth effect lurks a bubble — with the S&P 500 trading at a PE of 33 times CY25 earnings, even higher than its PE of 30 times during the dot com bubble. The risk here is how much hinges on just few companies. For example, in CY26, a few AI companies that make up just 2 per cent of S&P 500 companies are expected to drive 33 per cent of the earnings growth.

Thus, a triple whammy lurks if the AI boom hits a speed bump — a slowdown in capex triggering a US economic slowdown, severe market correction from bubble valuations, and financial and trade shocks. If this materialises, then it will have collateral damage in rest of the world, including in India. India has so far managed well, given the absence of an AI bubble here -- thanks to lack of AI stocks to invest, and superior regulation. It is important to have adequate risk guardrails for a bubble-break scenario.

Published on August 4, 2026