Five Factors Weighing on the KOSPI and the Outlook

Korean stocks are lagging global markets for five main reasons. The first is the size of the rate increase and how long rates stay high. The second is supply instability caused by the end of SK Hynix's share buybacks.

The third is uncertainty around the U.S. midterm elections and the semiconductor cycle. The fourth is the possibility of side effects when rates are cut. Dr. Park Jong-hoon said the KOSPI will either stay weak globally or rebound depending on how these factors change.

France's 10-year government bond yield is 4.9%, lower than the U.S., yet a financial crisis is now being raised as a possibility. That is because how sharply rates have risen recently is a better gauge of financial market instability than the absolute level.

Dr. Park Jong-hoon stresses that the recent size of the rise matters more than how high rates are. In France's case, the rise was very large, which is why crisis risk is being discussed.

Korea's 10-year government bond yield rose about 54%, from 2.94% to 4.54%. Over the same period, the U.S. 10-year yield rose about 24%, from 4.2% to 5.2%. Dr. Park Jong-hoon explains that a sharp rise from a low starting level delivers a bigger shock.

Because Korea rose sharply from a low level, households and companies feel the higher interest burden much more. The U.S. rose only slightly from an already high level.

The U.S. demographic profile means rates were bound to rise as the baby boomers, born 1946 to 1964, reached retirement. Korea's baby boomers, born 1955 to 1974, are still in their prime earning years, so analysts say it was not a time for rates to rise.

U.S. government debt stands at 126% of GDP, while Korea's is less than half that. This suggests Korea's sharp rate increase is abnormal given its demographics and fiscal position.

The National Pension Service has increased its equity allocation beyond the usual level and cut its bond holdings sharply. By one count, roughly 56 trillion won has flowed out of its bond holdings.

Funds cut their bond allocation from 19.9% to 16.6%, and foreign net stock selling reached a record 224 trillion won. That is about seven times the 34 trillion won sold during the 2008 financial crisis.

Retail investors pulled money out of banks, pushing bank bond issuance up 46%. The competition between government and bank bonds then drove government bond yields higher. As money leaves the market, the value of cash rises and rates climb.

The Bank of Korea began raising rates in July 2026, and critics called the move too late. The hike itself fueled market expectations that rates would rise further.

Money that flooded into stocks during the boom of the first half of 2020 has come back as a boomerang in the form of higher rates. Critics argue the central bank failed to hike at the right time.

Most household and corporate loans in Korea carry variable rates. When rates rise, interest costs jump immediately, which curbs household spending and cuts business investment.

In the U.S., a large share of mortgages are 30-year fixed-rate loans, which cushions the shock of high rates. Korea's 10-year treasury yield has stayed around 4% for more than five months, seriously hitting the real economy.

Korea's variable-rate structure quickly erodes household and corporate finances in a high-rate environment and weighs on the wider economy.

Retail sales fell in August, facility investment plunged 9.5%, and real wages dropped 3%.

Dr. Park Jong-hoon diagnoses that while exports are doing well, the domestic economy's warning lights are already flashing. That raises concern about the overall weakening of the economy's strength.

In September, individuals sold 18 trillion won and foreigners sold 16 trillion won, but corporate share buybacks of 32 trillion won propped up the market. With buybacks scheduled to end on October 18, investors began selling pre-emptively.

Samsung Electronics has executed 97% of its planned amount, and SK Hynix 83% to 90%. Dr. Park Jong-hoon argues that individuals and foreigners both sold in September and October out of anxiety that once buybacks end, nothing will be left to support the share price.

With only 17% of the buyback amount left, investors feel great uncertainty about where share prices will go once the buyback ends.

Some argue it would be better for the risk to be settled. Lingering uncertainty about when the buyback ends could create even more anxiety in the market.

Brokerage deposits fell from 140 trillion won to 100 trillion won, and margin trading ("debt investing") dropped from 38 trillion won to 33 trillion won. This shows individual investors' sentiment is souring.

Pension funds and asset managers are also reaching the limit of their buying capacity, leaving the domestic market short of buyers able to support it.

The core of the debate over whether AI chips are overvalued or undervalued comes down to whether data centers get built. Residents near AI data centers are pushing back hard over fears of higher electricity bills.

Ahead of the U.S. midterms, even Republican governors in states such as Texas have halted grid connections for new data centers. Texas holds 20% of all planned U.S. data centers, so the impact of such restrictions could be substantial.

Local resident opposition and political moves to regulate are becoming variables for AI industry growth.

Both U.S. parties are competing to promise data center regulation. In Georgia, the Republican candidate pledges tighter rules while the Democrats call for a temporary halt, so both sides are forced to court voters.

Even after elections, pressure from voters is likely to push regulation tighter. Even a modest scaling back of data center plans could shake the AI chip market, so the industry is watching closely.

Such moves toward tighter regulation could bring unexpected volatility across the AI industry.

Normally, stock prices rise when rates fall. But when rates fall and stocks fall with them, it is read as a bad sign of recession.

In June 2007, the U.S. rate was 5.26% and began to fall, yet by October 2007 stocks had dropped to 1565, a warning sign of the financial crisis. Whether a rate cut is a routine adjustment or a sign of recession must be judged by the length of the decline together with economic conditions.

In downturns, investors favor safe assets, so government bond yields tend to fall. At the same time, corporate credit risk gets priced in, so credit spreads rise, a paradoxical pattern.

Korea's credit spread is now 0.68 percentage points, versus 0.78 during COVID and above 2 points during the 2008 financial crisis. A fall in government bond yields alone is therefore no reason for comfort; spread trends must be watched to gauge whether companies are actually short of funds.

Domestic investors already went all-in with leveraged buying in May this year, leaving almost no room for further purchases. Dr. Park Jong-hoon assesses that virtually no domestic player is left who can buy stocks.

Samsung Electronics' shareholder return policy in January next year could be a spark for a rebound, but the semiconductor cycle will hinge heavily on U.S. politics and whether AI companies actually realize profits. The return of foreign investors is therefore expected to be a key variable for the domestic market.

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