Hong Kong Stocks Benefit as South Korea’s AI-Fuelled Rally Unwinds

South Korea’s reversal follows one of the most powerful stock-market rallies in recent history. The Kospi more than doubled during the first half of 2026 as investors pursued companies exposed to artificial-intelligence infrastructure, particularly Samsung Electronics and SK Hynix. At its peak, the index closed above 9,100 points, but it subsequently lost roughly one-quarter of its value. Samsung and SK Hynix together account for slightly more than half of the index, meaning changes in sentiment toward only two companies can overwhelm movements elsewhere in the market. A Reuters analysis of the downturn also found that margin debt and leveraged single-stock funds intensified the decline by forcing investors and fund managers to sell as prices fell. The Kospi nevertheless remained around 60% higher for the year, showing that the correction followed an extraordinary period of appreciation rather than a collapse in the underlying semiconductor industry.

Foreign investors withdrew nearly US$110 billion from South Korean equities during 2026 through early July, with SK Hynix accounting for approximately one-fifth of those sales. Some of the outflow represented portfolio rebalancing rather than a fundamental rejection of Korean technology: the rapid increase in Korean market capitalisation had made the country excessively large in some regional portfolios. Domestic retail investors absorbed much of the supply, purchasing 42.4 trillion won of Kospi shares in June and another 13.2 trillion won during the first half of July. Their reliance on borrowed money increased the market’s vulnerability, with margin-financed Kospi positions reaching 28 trillion won on July 14, close to the record of 29.8 trillion won recorded in late June. Strong earnings at Samsung and SK Hynix still support the long-term investment case, but the structure of the rally made short-term prices unusually sensitive to forced deleveraging.

Hong Kong offers an alternative source of technology exposure at substantially lower relative valuations. Before its recent rebound, the Hang Seng Tech Index was still down approximately 15% in 2026, compared with a 15% gain in the Nasdaq 100 and the Kospi’s much larger advance. Companies such as Alibaba, JD.com, Meituan and Baidu had lagged because they were more dependent on e-commerce, advertising and domestic consumption than on the highly profitable AI-hardware cycle. On July 16, the Hang Seng Index gained 1.3% and the technology gauge rose 2%, while Alibaba, Baidu and Meituan advanced 3.1%, 2.6% and 4.6%, respectively. A contemporaneous market assessment attributed much of that move to funds rotating away from AI hardware rather than to a sudden improvement in the companies’ operating fundamentals. Investors are effectively purchasing the possibility of a valuation recovery after an extended period of underperformance.

Expectations of additional Chinese policy support have strengthened the rotation thesis. China’s second-quarter economic growth of 4.3% fell short of expectations, creating pressure for Beijing to provide further assistance to domestic demand and strategically important technology industries. Easier policy, stronger consumption or clearer AI-monetisation strategies could improve earnings expectations for Hong Kong-listed internet groups. Nevertheless, the broader flow data remain mixed: the Institute of International Finance reported in its June portfolio-flow data that foreign investors withdrew US$30.5 billion from South Korean stocks but also removed US$14 billion from Chinese equities. This indicates that the current movement is primarily a relative-value trade within Asia, not yet a broad return of international capital to China.

Hong Kong’s ability to retain these inflows will therefore depend on more than turbulence in Seoul. Chinese technology companies must demonstrate earnings resilience, credible AI commercialisation and improving shareholder returns, while policymakers must stabilise domestic demand and confidence. South Korea could also recover quickly if semiconductor profits continue expanding and leveraged positions are cleared, particularly because forward valuation multiples have declined as earnings forecasts have risen. The most realistic interpretation is that the Korean sell-off has created a window for Hong Kong’s neglected technology shares to be re-rated, but a lasting capital migration will require stronger corporate fundamentals and sustained liquidity rather than temporary dissatisfaction with crowded AI trades.