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After an ugly start to the week for the South Korean equities market, signs of a potential recovery were emerging on Wednesday.
The iShares MSCI South Korea ETF EWY, a U.S.-listed exchange-traded fund that tracks an index of South Korean stocks, rebounded a sharp 1.5% on Wednesday. That’s after the ETF had tumbled more than 10% on Monday — its biggest one-day decline since the “COVID crash” in 2020 — before continuing its slide on Tuesday, according to a note Wednesday from Bespoke Investment Group.
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The Iran conflict appeared to make investors exposed to South Korean stocks particularly nervous, as bombing in the Middle East has disrupted shipments of oil and natural gas that flow to Asia and elsewhere.
South Korea’s economy is particularly vulnerable to the disruption as it’s dependent on the rest of the world for energy products, said Kevin Khang, a senior economist at asset-management firm Vanguard, in an interview Wednesday.
Crude-oil prices CL00 BRN00 have jumped this week amid fighting in the Middle East, but an easing in their climb on Wednesday appeared to help the iShares MSCI South Korea ETF’s rebound as the White House signaled support for the oil trade.
Treasury Secretary Scott Bessent said Wednesday on CNBC that the U.S. was pledging more support for the oil trade in the Persian Gulf, after President Donald Trump earlier announced measures such as U.S. Navy escorts for oil shippers, if needed.
Meanwhile, the South Korean equities market should continue to benefit from the artificial-intelligence trade, as Korean companies Samsung Electronics KR:005930 and SK Hynix KR:000660 supply memory chips needed for the buildout of artificial-intelligence infrastructure, according to Khang.
The top two holdings of the iShares MSCI South Korea ETF were Samsung Electronics and SK Hynix as recently as March 3. The fund remains up a massive 38% so far this year through Wednesday even after its plunge earlier this week, according to FactSet data.
The AI boom has helped fueled the run-up in the South Korean equities market, which still looks relatively cheap compared to the U.S., said Khang.
Just last Friday, South Korea’s benchmark stock-market index KR:180721 traded as high as 6,347 and was showing a year-to-date return of 50%. Come Wednesday’s close, the KOSPI was barely clinging to the 5,000 level and its return for 2026 had contracted to just 21%.
What happened?
Assessing the damage wreaked by a sheer 12% drop in Seoul trading Wednesday — the worst one-day decline since the global financial crisis of 2008 — Rich Privorotsky, head of European One Delta trading at Goldman Sachs, said Asian markets have moved “beyond fundamentals into forced derisking — selling what you can, not what you want — unwinding speculative length built up over recent months.”
For an economy so reliant on imported energy, Privorotsky believes the current spike in oil prices was “completely unpriced” in Asian markets. This is especially the case in South Korea, which is very dependent on liquified-natural-gas imports from Japan and where retail investors’ domination of trading has been almost complete in recent months.
Take, for example, the fact cited by SocGen analysts Rajat Agarwal and Frank Benzimra in their “KOSPI in a bear market” blogpost published Wednesday morning in Europe. They highlighted that “institutions, both foreign and domestic, have been net sellers of the market since November” — indicating that their low demand for Korean stocks has been replaced by domestic retail investors, egged on by pro-stock-market President Lee Jae Myung.
Interestingly, after being major net sellers of Korean equities in the last few trading sessions, international investors were net buyers Wednesday — accumulating 231 billion won ($157 million) of shares during the session, according to data from the Korean Exchange.
The record level of leverage in the Korean market has triggered margin calls and retail investors have had to sell whatever they can, which spills over from equities into precious metals — one of the reasons gold GC00 has recently traded like a risk asset.
Even though their order books are filled well into the future, shares of Korean memory-chip makers were still hammered: Samsung was down nearly 12% Wednesday, while and SK Hynix slumped more than 9%.
The SocGen analysts pointed out that Korean earnings are still essentially cyclical in nature and so remain susceptible to the emerging narrative of a stagflation risk brought about by the conflict in the Middle East.
Goldman Sachs’s Asian research team, however, is more upbeat about prospects for the Korean economy in the medium term. A note published Wednesday by the bank’s team in Hong Kong, led by Goohoon Kwon, maintained that the positive impact from chip exports would more than offset any drag from oil prices, even were the latter to reach $100.
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