South Korea's Kospi bounces back after historic drop; CLSA turns cautious

A day after its worst-ever daily rout, South Korea’s Kospi surged more than 12 per cent on Thursday and is on track for its biggest single-day gain since 2008 amid the ongoing West Asia war. 

South Korean benchmark index slid as much as 12 per cent on Wednesday amid panic selling, extending its two-day drop to about 18 per cent and wiping out roughly $625 billion in market value, Bloomberg reported. However, on Thursday, the index gained as much as 12.2 per cent, taking the year-to-date surge to 34 per cent.  

In calendar year 2025, the index rose 75 per cent as investors rushed to buy into the artificial intelligence (AI) frenzy, helping post back-to-back records. The kospi has surged 116 per cent year-on-year, or 131 per cent since April 9, CLSA said in a report, adding that such momentum has been surpassed only twice since 1980, in 1987 and 1999. 

 

Analysts at CLSA said its 2026 investment theme is 'Rotation' as the AI trade shows signs of exhaustion, prompting the brokerage to trim its overweight exposure from 20 per cent to 15 per cent. Investors may consider booking some profits as technical factors, valuations and concerns over excessive AI investments weigh on sentiment, though a prolonged technology cycle, earnings upgrades and domestic recovery continue to support the outlook, it said.   Investor sentiments turned risk-off as the US and Israel fired missiles across Iran last week, with the Supreme Leader Ayatollah Ali Khamenei being killed. Iran responded with strikes against Israel, as well as US bases and other targets in states including Saudi Arabia, Qatar, the United Arab Emirates (UAE), Kuwait and Bahrain  FOLLOW INDIAN STOCK MARKET UPDATES LIVE. 

Key risks post sharp rally

Analysts said investors may consider trimming exposure to Korean equities as several risk factors emerge. The brokerage noted that the Kospi has breached the psychological 5,000 level, prompting some investors to reassess their holdings. It also said Korean equities appear technically overbought.

 

CLSA highlighted concerns around potential overinvestment in the artificial intelligence theme. The brokerage also pointed to the high correlation between Korean and US equities, noting that US markets are approaching bubble-like territory. In addition, valuations appear stretched, with the market trading at around 2.1 times price-to-book, the highest level in the MSCI Korea index’s 30-year valuation history, CLSA said.   READ | Oversold stocks: 96 out of Nifty 500 shares RSI below 30; what it means?

Why should investors stay constructive? 

Despite near-term concerns, South Korea remains a late-cycle technology play, which could continue to benefit from the global technology cycle, the note said. It added that earnings revisions remain supportive, while domestic economic indicators are showing improvement.

 

CLSA also highlighted the government's 'value-up' corporate reform initiative, which adds a structural element to what has traditionally been a cyclical market story. In addition, it noted that foreign investors do not appear significantly overexposed to Korean equities, leaving room for further inflows.

 

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