Why did South Korea's KOSPI erase Monday's 2.2% rally in one session?

South Korean stocks fell sharply on Tuesday, erasing the previous session's rebound as foreign investors continued selling and domestic institutions withdrew their support.

The benchmark KOSPI declined 2.48% to 5,714.06 by 11:20 am in Seoul, having dropped 3.36% to 5,662.37 earlier in the session.

The retreat followed Monday's 2.24% rally, when the index closed at 5,859.08 on heavy institutional buying.

Samsung Electronics and SK Hynix fell 4.59% and 5.10%, but selling spread across several industries.

Retail investors stepped in to buy the dip, although uncertainty over artificial intelligence spending and the US midterm elections continued to weigh on sentiment.

Monday's institutional buying gives way to another sell-off

The biggest difference between Monday's recovery and Tuesday's decline was the behaviour of domestic institutional investors.

On Monday, institutions bought a net 1.23 trillion won of shares, helping the KOSPI gain 128.34 points and briefly touch 5,910.83.

Foreign and retail investors were net sellers, offloading a combined 1.72 trillion won. That imbalance left the rally heavily dependent on institutional support.

By around 9:30 am Tuesday, foreign investors had sold a net 388.1 billion won, while domestic institutions unloaded another 308.2 billion won.

Retail investors purchased approximately 670.4 billion won, but their buying was insufficient to offset the broader selling pressure.

Lee Kyoung-min of Daishin Securities told Yonhap News Agency on Monday that attractive valuations and improving corporate earnings could support a recovery.

His assessment reflected the optimism behind Monday's rebound.

However, the subsequent reversal suggests investors remain unwilling to commit to a sustained recovery without stronger buying support.

Wall Street's AI concerns spread beyond Korean chipmakers

The latest selling followed another difficult session for technology stocks in the United States.

The Nasdaq Composite declined 1.07% on Monday, while the S&P 500 lost 0.51%, as investors questioned whether expensive AI infrastructure projects would generate sufficient returns.

Oracle's plan to raise $20 billion through debt and equity intensified those concerns. Its shares fell 8.8%, while Micron Technology declined 5.8%.

The pressure quickly spread to Seoul. Alongside Samsung and SK Hynix, semiconductor equipment maker Hanmi Semiconductor lost 4.17%, while SK Square dropped 4%.

The retreat was not confined to technology.

POSCO Holdings declined 5.3%, SK Innovation plunged 7.76%, and the smaller-company KOSDAQ index also weakened.

Han Ji-young of Kiwoom Securities told The Asia Business Daily on Tuesday that weakness in American AI stocks was outweighing potentially supportive developments, including lower oil prices and interest rates.

Can retail buying save the KOSPI ahead of US election results?

Retail investors have continued buying during the sell-off, helping the KOSPI recover from its steepest early losses.

However, the index's struggle to hold above 5,700 illustrates the uncertainty surrounding its immediate direction.

Attention is also shifting towards Tuesday's US midterm elections, with results expected to emerge during Wednesday's Asian trading session.

The outcome could influence Treasury yields, the dollar and global demand for riskier assets.

Kim Jae-seung of Hyundai Motor Securities warned that retail investors had less buying capacity following the market's earlier rally and subsequent correction.

However, he also highlighted an important counterargument.

Improving long-term earnings forecasts for semiconductor companies have pushed forward valuation multiples towards historically low levels, potentially creating opportunities for patient investors.