South Korea was the world's worst-performing stock market in the third quarter following a vicious sell-off in July when one of the year's most popular AI trades unwound. The benchmark Kospi fell 18.8 per cent in the three months to September 30 due to the sell-off in memory chip stocks at the start of the quarter. Investing in companies such as Samsung Electronics and SK Hynix had become one of the most popular ways to take a bullish view on AI.

The second worst-performing major index was China's benchmark CSI 300, which fell by 12.5 per cent in the quarter. The S&P 500 gained 2.3 per cent. Despite the decline, the Kospi is still up 60 per cent this year, making it one of the world's top stock markets along with Taiwan.

The Korean market had become a proxy for investors' views on the colossal spending in AI infrastructure, said Prashant Bhayani, chief investment officer for Asia at BNP Paribas Wealth Management. The implosion of Leopold Aschenbrenner's hedge fund Situational Awareness, which had taken outsized leveraged positions in South Korean memory stocks, combined with the irrational exuberance of the country's rabid retail investor base buying leveraged single-stock ETFS, combined to create a sharp unwind in positions in July. Now the prospect of higher global yields is threatening to end a record-breaking run for the Korean stock market, which has risen more than 185 per cent since the start of 2025. "I do think the bond market is going to weigh on equities -- it's a global thing," said Jongmin Shim, head of Korea research at CLSA.

Bhayani of BNP Paribas said valuations in Korea had become more attractive since the July sell-off but there was little chance of another sharp rise in valuations. "We could see reasonable returns but are you going to see 70 per cent? No way," he said. There has already been a derating in the market. The forward price-to-earnings ratios for SK Hynix and Samsung Electronics, which together make up about half of Korea's stock market capitalisation, have fallen to a range between four and five.

Joshua Crabb, head of Asia-Pacific equities at Robeco, said higher bond yields were a "headwind" for Korean equities but noted that the country's chipmakers "already trade on low single-digit multiples, so the direct valuation impact should be limited".