Kospi tumbled 20% in 7 sessions — how long will recovery take?

After suffering double-digit losses this year, the Kospi has taken an average of 14 trading days to recover — raising the question of whether it can bounce back at a similar pace following last week's sharp plunge of more than 10 percent.

According to Korea Exchange, the Kospi shed a cumulative 20.7 percent over seven trading sessions from Oct. 6 to Oct. 15, its longest losing streak of the year. For the week of Oct. 12 to Oct. 16, the index tumbled 14.5 percent.

The index managed to snap its losing streak on Friday, the final trading day of the week, rising 2.05 percent — its first gain in eight sessions.

The Kospi had briefly reclaimed the 7,000 level on Oct. 2, touching 7,003.74, before the consecutive declines dragged it down to 5,668.05 by Friday.

Looking at this year's episodes in which the index fell more than 10 percent over two or more consecutive sessions before recovering, the average recovery period was 14.25 trading days.

From July 28 to July 30, the Kospi dropped 17.2 percent over three sessions, then recovered within 10 trading days on Aug. 13.

A 14.9 percent decline over three sessions from June 4 to June 8 was reversed in seven trading days, while a 10.4 percent drop over four sessions from March 26 to March 31 took six trading days to recover.

The steepest recovery time this year came after the shock of the Iran war's outbreak: a 19.2 percent drop over three sessions from Feb. 27 to March 4 took 34 trading days to claw back.

That period coincided with a sustained inflow of investment capital driven by optimism over the memory chip industry, which had propelled the index to successive record highs above the 9,000 level.

Not every plunge has led to a recovery, however. A 10.4 percent decline over three sessions from July 6 to July 8 broke the 8,000 level, and the index has yet to reclaim it.

The pace of recovery seen this year is considerably faster than in past downturns.

In March 2020, when the COVID-19 pandemic triggered widespread fear, the Kospi plunged 25.7 percent over seven sessions. It did not recover until May 19 of that year — 39 trading days later — as expectations for vaccine development gradually lifted sentiment.

The 12.1 percent drop recorded over two sessions from Aug. 2 to Aug. 5, 2024, took roughly 10 months to recover. That selloff was driven largely by fears of unwinding yen carry trades — a strategy in which investors borrow in low-interest-rate yen to invest in higher-yielding assets — triggered by a sharp strengthening of the Japanese currency.

When fears of a global economic slowdown emanating from the United States and China weighed on markets in the early 2010s, the Kospi fell below the 2,000 level and stayed there for an extended period. A 17 percent drop over six sessions from Aug. 2 to Aug. 9, 2011, was not fully recovered until late April 2015 — more than three and a half years later.

During the global financial crisis triggered by the collapse of Lehman Brothers, the Kospi fell below 1,000 after losing 22.2 percent over four sessions from Oct. 21 to Oct. 24, 2008. It took more than two months just to reclaim the 1,200 level it had held before the crash.

Analysts say there is meaningful room for the Kospi to recover its recent losses, but that the return of foreign investors will be the decisive factor.

From Jan. 2 through Oct. 16 this year, foreign investors net sold 208.33 trillion won ($154 billion) worth of domestic equities. Over the same period, institutional and retail investors net bought 40.13 trillion won and 101.06 trillion won, respectively.

Lee Jae-won, an analyst at Yuanta Securities Korea, said the episodes in which the market failed to recover were accompanied by additional economic or credit shocks — such as the global financial crisis and the European debt crisis — or by downward revisions to earnings forecasts. "At present, there is no confirmed systemic crisis in the financial system or structural deterioration in memory chip earnings outlooks," he said.

He added, however, that stabilizing the selloff would first require a slowdown in the pace of foreign selling and an influx of buying demand to absorb it.

Lee Sang-jun of NH Investment & Securities noted that foreign ownership of semiconductor stocks — where net selling has been concentrated — has fallen to around 48 percent, the lowest level since 2010. "We expect the supply-demand environment to improve as the third-quarter earnings season progresses," he said.

He also said that once the initial public offering of US AI startup Anthropic, scheduled for early November, is completed, capital reallocation ahead of the listing should wind down and selling pressure from foreign investors may ease.

Kim Jae-seung of Hyundai Motor Securities said he is watching for developments after Anthropic's listing in mid-November. "Before the listing, concerns about foreign capital outflows tied to the large IPO could intensify," he said. "But after the listing, the supply-demand overhang should ease, and reduced uncertainty around AI profitability could broaden foreign investor sentiment."