Citi Downgrades South Korea's Kospi Amid Chip Volatility and ETF Unwind

The Kospi's 4% drop on Monday, following a holiday, indicates the market is still navigating the unwind of one of 2026's most crowded trades. Citi's downgrade of South Korea to tactical neutral, after a year of overweight positioning, signals a shift in institutional sentiment amid a retail-driven sell-off.

Korean stocks have seen a 23% decline in July alone, yet are still up 55% year-to-date. This recent pullback appears to be a significant reset within an ongoing bull market rather than a fundamental breakdown, aligning with Citi's continued bullish stance on artificial intelligence (AI) while reducing exposure specific to Korea.

Citi's recent rotation strategy includes upgrading China to overweight while maintaining an overweight position on Taiwan, suggesting a more selective approach to the AI trade rather than a complete exit. Investors are now focusing on the potential for broader market performance in the latter half of 2026, moving away from the concentrated AI-led growth that characterized the earlier part of the year.

The volatility in South Korea's market has been attributed to retail enthusiasm for single-stock leveraged ETFs and growing valuation concerns. Citi remains cautious about fully rotating out of technology within its emerging market allocation, framing the downgrade of Korea as a tactical adjustment rather than a departure from the AI theme.

Despite the recent downturn, the Kospi's performance this year underscores the impact of the leveraged ETF unwind and chip stock volatility, while the overarching AI investment narrative remains intact in Citi's view.