San Francisco Frontiers - Kospi Falls Below 5,000 as U.S. AI Regulation Fears Trigger Circuit Breaker

South Korea’s benchmark Kospi index plunged more than 8 percent on Friday, falling below the 5,000 mark for the first time in nearly nine months and triggering a circuit breaker. The sharp decline was driven by investor fears that tighter U.S. artificial intelligence regulations following the Democratic Party’s landslide victory in the midterm elections would negatively impact global technology markets.

The sell-off was so severe that it triggered a sidecar, a local trading mechanism that temporarily suspended program sell orders to stabilize the market. This marked the first time the Kospi had dropped below 5,000 since February 2 of this year. The panic extended beyond domestic equities, with Korean retail investors also suffering heavy losses in leveraged U.S. exchange-traded funds (ETFs) tied to semiconductor stocks.

Retail investors were particularly hard hit because they had recently accumulated significant positions in the country’s largest technology firms. According to financial market data site Check Expert+, Korean retail investors made net purchases of 5.8 trillion won ($4.3 billion) in Samsung Electronics and 3.4 trillion won in SK hynix between October 6 and Thursday. These were the largest and second-largest net purchase amounts among all domestically listed securities, including ETFs, during that period.

The exposure to these volatile assets left many individual investors with substantial unrealized losses. Jin, an office worker in their 50s, reported that his portfolio had fallen nearly 40 million won from its peak in June. He stated he was no longer in a position to withdraw funds and was urgently seeking loans from banks or relatives to cover immediate expenses.

Jin is scheduled to move into a new apartment at the end of the month but is struggling to raise the remaining 90 million won ($66,000) payment after the plunge in his invested shares. "I heard the Kospi fell below 5,000 today, so I didn’t even want to look at my trading app and deliberately didn’t open it," Jin said.

The market turmoil also disrupted personal financial plans for younger investors. Park, a 27-year-old who had invested 20 million won of savings from his time at Samsung Electronics to build wedding funds, reported a loss of 4 million won. "Loans are blocked and stocks are falling, so I don’t know how I’m supposed to get married in this situation," Park said.

Online stock communities were flooded with expressions of distress. One investor lamented, "I thought yesterday was the bottom, but there was still a basement." Another wrote, "I held on trusting what the experts said, and now I’m about to lose a year’s salary." A third post questioned Korea’s economic status: "How is Korea an economic powerhouse when its stock prices get battered by China and the United States?"

Jang, a 27-year-old office worker who had seen returns rise to 50 percent in April before dropping 40 percent, expressed uncertainty about the market's trajectory. "I can’t even get a sense of how long the bear market will last," Jang said. "I’ll hold out until the first half of next year, and if it doesn’t work out, I’ll get out of stocks."

Investors with exposure to U.S. markets also faced direct losses. Lee, a 32-year-old who had held the Direxion Daily Semiconductor Bull 3X Shares (SOXL), a triple-leveraged ETF tracking a U.S. semiconductor index, since the previous year, reported losing several million won. The SOXL plunged 38.71 percent on Thursday, while the tech-heavy Nasdaq fell 5.52 percent.

"I knew leverage itself was high-risk, but it’s disheartening to see chips, which I’d expected to keep climbing steadily, fall like this," Lee said.

Despite the immediate panic, some analysts suggested the market reaction may have been excessive relative to the underlying economic fundamentals. Lee Jin-woo, head of the research center at Meritz Securities, noted that while the current decline and market reaction were somewhat excessive given the direction of AI data center investment, a sharp rebound was unlikely in the short term due to unresolved uncertainty.

However, he added that there were no factors indicating the stock market plunge would turn into a crisis in the real economy. "I expect the market to recover after a certain time lag, even if it remains unstable for the time being," Lee Jin-woo said.

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