AI Rally Crack? Record Outflows Hit KOSPI Despite 80% YTD Surge

South Korea’s KOSPI has surged over 80% in USD terms since the start of 2025, becoming one of the strongest major global equity markets. The stunning rally is driven by memory chip leaders; SK Hynix recorded a 405% year-on-year jump in Q1 operating profit.

Nevertheless, extreme divergence has appeared in capital flows. The $23 billion iShares MSCI South Korea ETF saw a record weekly outflow of $970 million. Investors began aggressively reducing holdings despite the historic uptrend.

Malcolm Dorson, Senior Portfolio Manager at Global X, explained the selling pressure: "Given the significant appreciation in Samsung and Korean assets, portfolio concentration naturally increased, forcing some managers to sell." He stated that a large part of the outflows belonged to passive rebalancing rather than bearish bets.

Apart from passive adjustment, some funds adopted the classic “Sell in May” strategy to lock in profits. Meanwhile, the ETF’s short interest ratio rose to 14.81%. Tom Graff, CIO at Facet, clarified:"The rise in short interest is more likely hedging of individual stock positions rather than an overall bearish view."

Wall Street remains sharply divided on KOSPI’s mid-term trend. JPMorgan and Goldman Sachs both upgraded the index’s base target to 9,000 points, betting on sustained AI export prosperity. In contrast, Nomura warned foreign investors are actively taking profits after last year’s AI accumulation.

Beneath the strong index performance, South Korea’s K-shaped economic divergence continues to worsen. Household consumption contracted for the first time post-pandemic, as the semiconductor boom failed to drive broad economic recovery. Nomura economist Jeong-Woo Park commented: "The chip boom's spillover to the broader labor market and domestic investment is quite limited."

Technically, semiconductors currently occupy 60%-70% of KOSPI’s total market capitalization. Stripping out the chip sector, the index falls to roughly 4,100 points. The extremely single-industry structure amplifies market volatility.

KOSPI has entered a high-level consolidation stage. The market is caught between bullish supercycle expectations and structural economic flaws. The unilateral upward window has closed, and investors should focus on the support range of 7,000–7,200 points.