South Korea's stock market was once the hottest bet on this year's global AI trade, but it is now facing a buyer drought.

In the first half of this year, South Korea's Kospi drew global capital with the strongest performance among major global stock benchmarks. In the second half, the same market has fallen 22%, making it the world's worst performer. Meanwhile, Taiwan and U.S. stock markets, which are similarly AI-heavy, keep setting record highs.

According to Bloomberg, foreign investors have withdrawn a net $131 billion from Korean equities this year, the largest outflow among major Asian markets. Market turnover has plunged 70% from its peak at the end of May, with retail and institutional investors retreating in tandem.

Two chip giants make for one overly concentrated bet

The rise and fall of South Korea's Kospi is almost entirely dominated by two memory chip giants, Samsung Electronics Co Ltd and SK Hynix Inc. Together they account for more than 50% of the Kospi's weighting and were the core drivers of the index's surge in the first half of the year, but they have now become a drag.

Phillip Wool, head of portfolio management at Rayliant Global Advisors, put it bluntly: "For most investors — especially those who entered Korea recently because of the memory chip trade — the easy money in this theme has already been made." He said his fund has taken profits on Korean AI stocks and is now underweight both SK Hynix Inc and Samsung Electronics Co Ltd.

The market's skepticism was laid bare last Thursday: Samsung Electronics Co Ltd's quarterly operating profit surged nearly ninefold year on year, yet its share price fell instead of rising.

Buyback wave nears its end, leaving a vacuum in buyer support

Another pillar supporting Korean stocks is also loosening.

The combined share buyback programs of Samsung Electronics Co Ltd and SK Hynix Inc, worth about 55 trillion won (roughly $41 billion), are nearing completion. According to JPMorgan data, buybacks by the two chip companies accounted for the bulk of about $23 billion in buy orders in the Korean market last month.

Once the buybacks end, the market will face an obvious vacuum in buying demand.

Richard Tang, head of research in Hong Kong at Julius Baer, said: "We are seeing capital increasingly flowing back to the U.S. stock market, which is exacerbating the persistent foreign outflows from the Korean market."

Retail investors exit, leveraged funds still not recovered

Retail investors were an important force behind the Kospi's doubling in the first half, but July's rout has kept them away so far.

According to data from the Korea Financial Investment Association, margin balances have stayed at about 33 trillion won over the past month, far below the peak of 38.6 trillion won in June. Investor deposits in brokerage accounts waiting to enter the market have also fallen from a record high of nearly 140 trillion won to about 100 trillion won.

Jon Withaar, a portfolio manager in Singapore at Pictet Asset Management, said: "Memory chip stocks have become value stocks, and they look cheap based on current earnings. But retail investors and fast-money hedge funds do not chase value, they do not chase 'cheap.' What they chase is growth."

Taiwan stocks emerge as an alternative as AI capital shifts faster

As Korean stocks lose appeal, Taiwan's stock market is becoming a more favored AI alternative for institutions.

The Taiwan Weighted Index has risen 70% this year and outperformed the Kospi by about 23 percentage points last quarter, the biggest quarterly gap this century. Gains in Taiwan stocks are also more broad-based — about 10% of constituents have at least doubled this year, compared with only 4.7% for the Kospi.

Chun-Lai Wu, head of Asian asset allocation at UBS Global Wealth Management's chief investment office, said: "At present, we prefer to express tactical AI exposure through Taiwan stocks. Taiwan has a more complete technology hardware ecosystem and is supported by strong spending plans from major technology companies."

Of course, some investors believe the decline in Korean stocks has created buying opportunities, arguing that AI spending and memory chip profitability remain resilient, and that South Korea's continued corporate value-up reforms also offer some appeal. Thanks to its sharp gains in the first half, the Kospi is still among the top performers for the full year.