Despite recent external headwinds, the KOSPI on the 3rd, the first trading day after the Iran crisis, plunged more than 7% and even surrendered the 5,800 level. Retail investors known as Donghak ants absorbed foreign selling, but they appeared unable to overcome the chill in investor sentiment from worsening Middle East tensions and the major shock of rising oil prices. While concerns about sell Korea have surfaced as foreigners net sold more than 12 trillion won on the KOSPI over two days, the prevailing view in the brokerage industry is that this was profit-taking.

The 7.24% decline in the KOSPI that day was the steepest since Black Monday on August 5, 2024, when the domestic market plunged as yen carry trades were unwound. The KOSPI 200 Volatility Index (VKOSPI), known as the Korean fear gauge, closed at 62.98, up 16.37% on the day. That is the highest level in six years since March 19, 2020 (69.24), when the pandemic triggered a market crash.

In particular, Samsung Electronics (-9.88%), SK Hynix (-11.5%), and Hyundai Motor (-11.72%), which are at the center of investor flows, suffered an unusually steep slide, further heightening perceived fear.

The severe market shake-up is seen as driven by worries that a surge in oil prices could stoke inflation and reduce the number of US policy rate cuts. If the expected number of US rate cuts declines, liquidity supply will be lower than the market had anticipated, a negative for equities.

Normally, in geopolitical crises, safe assets such as the dollar, gold, and government bonds strengthen, but this time major sovereign bond prices fell instead amid concern that inflation will slow the pace of rate cuts.

Some analysts say the domestic market was hit especially hard because the KOSPI had risen so quickly that overheating was a concern. Since the Iran crisis, the KOSPI has fallen more than Taiwan Taiex (-3.08%), China Shanghai Composite (-0.97%), and even Japan Nikkei 225 (-4.43%), which, like Korea, has high dependence on oil imports.

Kim Hak-gyun, head of research at Shinyoung Securities, said that Korea was taking multiple blows at once, and even allowing for that, it fell more, adding that because Korea had risen so sharply, the correction was correspondingly harsher.

Some also assess that the Iran episode provided a timely selling opportunity for foreigners who needed to engage in rebalancing (portfolio weight adjustment) and profit-taking after the KOSPI surge. Over two trading days, foreigners were net sellers of more than 12 trillion won on the KOSPI, and more than 11.5 trillion won of that came from just two stocks, Samsung Electronics and SK Hynix.

Kim Su-hyun, head of research at DS Investment & Securities, said that as Samsung Electronics and SK Hynix rose, foreigners exceeded their required Korea allocation and sold the excess, adding that with the exchange rate jumping, investors with profit-taking motives likely sold as well.

Even so, many in the market believe this episode may not significantly affect corporate earnings, leaving room for foreign investment to return and for the KOSPI to rebound.

Kim added that when the exchange rate approaches a peak, foreigners tend to reenter Korea seeking foreign-exchange gains, and that regarding the KOSDAQ, they appear to be coming in on the back of government policy.

Kim Seok-hwan, an analyst at Mirae Asset Securities, said that historically war has delivered only temporary shocks to financial markets and has not damaged the fundamental value of companies over the long term, adding that investors should refrain from panic selling driven by short-term fear.

However, there are also concerns that if the Middle East situation deteriorates or the earnings report from Broadcom on the 4th (local time) comes in below market expectations, AI-driven anxiety could intensify.