July 13, 2026, (Inside AI) — South Korea's Kospi index plunged 9% on Monday, deepening a 27% loss over three weeks as AI stock jitters collided with a retail debt crisis. The sell-off marks a dramatic reversal for what was the year's top-performing equity market.
Foreign investors dumped nearly $13 billion in Korean equities in June, but the rout was amplified by record retail margin debt. Brokerages automatically liquidated over $100 million in retail positions on Thursday as accounts ran out of cash, Seoul Economic Daily reported.
The turmoil contrasts with Taiwan, another AI-heavy market, where the TAIEX index slipped just 2.3% in the same period. Both indexes are dominated by chip giants: Samsung Electronics and SK Hynix account for 54–60% of the Kospi, while TSMC holds about 40% of the TAIEX. The divergence exposes how South Korea's retail leverage fueled a uniquely fragile boom.
The Leverage Trap That Snapped
In late May, Korean regulators launched domestic single-stock leveraged products to stem an exodus of retail money into US leveraged ETFs. Because rules restrict such products to stocks with over 10% market weight, only SK Hynix and Samsung qualified. The products exploded in popularity, pushing margin debt to a record $39 billion in May, according to ValueTheMarkets.
Retail investors borrowed heavily or used ultra-short-term options requiring minimal upfront payments. By June 10, leveraged investments hit limits at local brokerages, Reuters reported. When AI fears triggered a sell-off, the unwinding was brutal.
Jefferies noted that the 16 single-stock leveraged ETFs tied to Hynix or Samsung, listed in late May, are down 30% from their June 25 peak in asset terms. The Kospi itself is 22% below its June 19 peak. As foreign selling intensified, retail investors lacked the firepower to absorb the shock.
Taiwan's Cushion: Dividends Over Debt
Taiwanese investors largely avoided this trap by favoring passive, high-dividend ETFs that provide steady payouts. This income focus encourages holding through downturns, insulating the TAIEX from forced selling. The contrast underscores how product design and investor behavior can make or break market stability during sector-wide corrections.
Goldman Sachs' Christian Mueller-Glissmann called the AI selloff a "cyclical" event worsened by overleveraged retail positions, but said the structural AI trend remains intact. Jefferies echoed that AI stocks will stay attractive as long as the "AI arms race" continues.
The crisis has already reshuffled global rankings: Nigeria's stock market, up 68% this year in dollar terms, has now surpassed South Korea's 66% gain, Bloomberg reported. As margin calls cascade, the episode serves as a stark warning about the perils of leverage in concentrated, hype-driven markets.
