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A tale of two stock markets: What explains the rise and fall in Taiwan and South Korea?

While South Korea's Kospi is down 27% from its peak, another AI-heavy market, that of Taiwan, has remained relatively resilient. Here is why.

A screen shows the Korea Composite Stock Price Index (KOSPI) at a dealing room of Hana Bank in Seoul, South Korea on July 13. (Kim Ju-hyung/Yonhap via AP)

Written by: Akash Mandal

4 min readMumbaiJul 14, 2026 05:40 PM IST First published on: Jul 13, 2026 at 07:07 PM IST

The South Korean market, once the best performer so far this year among equity markets, crashed 9% again on Monday (July 13) and is down 27% over the past three weeks as panic regarding the AI rally being overstretched deepens. The rising debt among retail investors in the country has also amplified this problem at a time when foreign investors are already selling heavily.

However, Taiwan, which is another AI-dominated market, has been much more resilient so far during this meltdown. The country’s benchmark TAIEX index is down just around 2.3% in the preceding three weeks.

Both the TAIEX and South Korea’s Kospi index are dominated by a handful of AI stocks — Samsung Electronics and SK Hynix make up 54-60% of the Kospi, while TSMC has around 40% weight on the TAIEX. So, why has there been a divergence in the performance of both markets?

Rising debt among South Korean retail investors

The South Korean market faces structural issues of its own, with retail investors being sucked out of money due to rising debt to absorb the massive selling by foreign investors since the start of 2026.

US-based leveraged products, which double the gains and losses of retail investors, started gaining popularity in the post-Covid era, which led to billions of dollars of Korean money flying to the US. To counter this, the South Korean regulators launched domestic single-stock leveraged products late in May. Because the financial regulators allowed companies making up over 10% of the market to be traded using these products to protect investor safety, these products were reduced to only two underlying stocks — SK Hynix and Samsung.

Also Read | AI-rally overstretched: Why the South Korean market crashed 10% on Tuesday with trading being halted

These domestic leveraged products gained popularity instantly, leading to retail investors either borrowing heavily from brokerages to buy more stocks or overusing specific “ultra-short term” options provided by brokers, which allow investors to buy stocks by paying only a small portion upfront.

This led to margin debt for retail investors in the country swelling to a record high of $39 billion in May, according to a report by ValueTheMarkets. Leveraged stock investments by retail investors reached the limits set by local broking firms, said a Reuters report from June 10.

“The Kospi is now down 22% from its peak reached on June 19, while the 16 single-stock leveraged ETFs linked to Hynix or Samsung Electronics listed in Korea in late May are down 30% from their peak in asset terms on June 25, as is to a much lesser extent margin debt,” according to a report by Jefferies from last week.

Thus, while foreign selling has intensified, with FPIs dumping nearly $13 billion-worth of South Korean equities in June as concerns regarding the AI rally deepened, retail investors have run out of money to absorb the shocks.

On Thursday, the market saw over $100 million of retail stock positions being automatically liquidated by brokers as accounts ran out of cash, according to a report by Seoul Economic Daily. The crisis has seen the Nigerian stock market, up around 68% so far this year in dollar terms, surpass South Korea’s 66% gain in dollar terms, according to a Bloomberg report from last week.

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While the “hyper-speculative” and risky leveraged products are wildly popular among South Korean retail investors, Taiwanese investors have instead preferred passive options such as high-dividend ETFs, which provide monthly or quarterly payouts, making such investors stick to their investments even during temporary crises.

However, many experts remain constructive on AI stocks despite the correction. While AI stocks, especially those in South Korea, have seen “healthy” corrections from peaks, these stocks will remain the go-to option for investors as long as the “AI arms race” continues, the report by Jefferies noted.

Christian Mueller-Glissmann, Managing Director for portfolio strategy and asset allocation at Goldman Sachs, said last week that while AI stocks faced a “cyclical” selloff worsened by overleveraged retail positions, the overall AI trend remains structurally intact and is expected to drive equities going ahead.