Semiconductor selloff sparks rotation into financials, retail and energy

Signs of a shift are emerging in South Korea's stock market as semiconductor shares — the driving force behind the Kospi's historic breach of the 8,000 mark — begin to falter.

Foreign investors have concentrated heavy selling in large-cap chip names such as Samsung Electronics and SK Hynix, and analysts say capital may be rotating into sectors that had been largely overlooked during the rally.

The domestic market had seen extreme concentration in semiconductor and AI-related stocks in recent weeks, but profit-taking that emerged this week has begun to narrow the performance gap between sectors, according to the financial investment industry.

Shin Eol, a researcher at Sangsangin Securities, wrote in a recent report that "the intense concentration in large-cap semiconductor and substrate stocks that persisted through early this week eased in the form of a sharp profit-taking selloff." He added that "following the market holiday on Wednesday, a broader warming trend began to spread in earnest, centered on financials and retail."

The pullback was particularly steep in semiconductor substrate stocks, secondary battery shares and some large-cap IT names that had surged more sharply in the short term than the major chip stocks themselves, Shin said.

By sector, insurance (+14.7 percent), retail (+8.7 percent) and banking (+5.5 percent) all closed higher compared with the previous week, while IT hardware (-14.7 percent), construction (-6.2 percent) and steel (-5.2 percent) declined. "Even as the overall market level fell, the warmth actually spread further," Shin added.

Foreign capital flows are also lending weight to the rotation thesis. Shinhan Investment said in a recent report that sectors showing strong earnings momentum extend well beyond IT to include industrials, financials, consumer goods, telecommunications and energy. Of those, retail, cosmetics and apparel, and energy were identified as the sectors drawing simultaneous inflows from both foreign investors and pension funds.

Kang Jin-hyeok, a researcher at Shinhan Investment, said foreign selling pressure on the Kospi, centered on semiconductors, is intense, and that the decline in the Kospi and large-cap semiconductor stocks can be explained by technical factors — namely valuation pressure — as well as sentiment.

"Where the supply that has exited semiconductors will go requires a comprehensive look at both earnings and fund flows," he added. "The sectors seeing simultaneous inflows from foreign investors and pension funds are retail, cosmetics and apparel, and energy."

Retail and cosmetics stand to benefit from rising inbound tourism and a wealth effect tied to the broader market rally, while energy is seen as attractive given Middle East geopolitical risk and rising summer demand. Foreign ownership ratios in these sectors have also risen consistently over the past month.

Analysts say a rotation-driven market may persist for now. While foreign selling and a sharp rise in the exchange rate present macro headwinds, there is growing expectation that capital flowing out of semiconductors could spread into financials, retail, cosmetics and energy — and further into materials, components and equipment stocks as well as robot-related plays — potentially extending the market's gains more broadly.