It's the benchmark index that tracks the performance of about 800 companies listed on South Korea's main stock exchange.

Many of them are household names: Samsung Electronics, Hyundai Motor Company, and LG Energy Solution.

Now get this.

In Australia's FY26 period, 1 July 2025 to 30 June 2026, the KOSPI skyrocketed by more than 170%.

Imagine the ASX 200 doing that.

Gobsmacking, right? (The ASX 200 rose by 3% in FY26.)

And the main driver of the KOSPI's extraordinary performance?

You may assume artificial intelligence (AI), given the staggering 807% share price rise for chipmaker SK Hynix Inc in FY26.

Not to mention the 459% share price surge for consumer retail giant, Samsung Electronics, which also makes AI chips.

While irrational exuberance over AI played a big role in KOSPI's seismic rise, there were other drivers, too.

Some of them, you won't believe. And they help explain the KOSPI's peak-to-trough crash of 44%.

Let's get into it.

Why did the KOSPI go stratospheric in FY26?

The first thing to know is that SK Hynix and Samsung Electronics represent about half of the KOSPI's total market capitalisation.

That's nuts!

By comparison, BHP Group Ltd (ASX: BHP) and Commonwealth Bank of Australia (ASX: CBA) make up about 20% of the ASX 200.

But I digress.

SK Hynix and Samsung shares have become bellwethers for the global AI boom.

The companies are key global suppliers of critical hardware used in artificial intelligence infrastructure.

In particular, they supply high-bandwidth memory (HBM) chips used for powering modern systems designed by companies like Nvidia.

Being 50% of the index, SK Hynix and Samsung make the KOSPI incredibly tech-heavy and exposed to AI volatility.

That means it can strongly run on market exuberance, and severely contract on market fear.

In FY26, as SK Hynix and Samsung shares soared, they pushed the KOSPI higher.

More investors, including foreigners buying directly or via exchange-traded funds (ETFs) on their local exchanges, piled in to what you might call South Korea's Magnificent Two.

Now we look at the lesser-known factors behind the KOSPI's astronomical rise.

AI sentiment not the only driver of KOSPI's boom and bust

South Korea, which has long been considered a 'developing market', got a new president in 2025.

The KOSPI didn't command much interest from investors despite its household names.

New President Lee Jae Myung wanted to change that.

He saw a role for the KOSPI in stimulating the economy, raising per capita wealth, and attracting overseas investment amid the AI boom.

The first step was overcoming the 'Korea discount'.

The Korea discount refers to the tendency for KOSPI stocks to trade at lower valuations than similar companies around the world.

The main reasons for this included corporate governance concerns, low shareholder returns, and lenient regulatory oversight.

Shortly after his inauguration in June 2025, President Lee said:

At the core of a capitalist economy lies the stock market.

The most important task is to resolve, or at least alleviate, the unfairness and opacity of the stock market.

New rules were brought in to stamp out insider trading and market manipulation, and force company boards to act in the best interests of shareholders.

Sounds like a positive change for investors, but here's the potentially problematic part.

Government encourages ordinary citizens to jump in

President Lee actively sought to make the South Korean stock market more appealing to ordinary citizens.

President Lee said (courtesy The Korea Herald):

If equities become an alternative investment destination that people find as attractive as real estate, then by allowing people to get more dividends and make money to cover living costs, companies will find it easier to attract capital, and a virtuous cycle will be created.

The President pledged to incentivise companies to pay higher dividends, thereby making investment more attractive.

On top of that, the rules around using debt to buy shares were loosened, which enabled greater access to the market.

Ordinary South Koreans jumped in, and between June and December 2025, the KOSPI rose more than 50%.

So, it wasn't just the extraordinary profits from SK Hynix and Samsung driving the market higher.

The sheer volume of new and inexperienced investors ploughing newly accessible funds into the market also pushed the KOSPI up.

Want to double your bet?

Then came the opportunity to leverage the KOSPI's astronomical gains, also courtesy of new government policy.

In April, South Korea followed other international markets in allowing single-stock leveraged ETFs to trade on the KOSPI.

Of course, SK Hynix and Samsung dominated these ETFs because of their runaway share price growth.

The leveraged element meant that stock price movements were amplified either way.

KB Financial Group estimates South Korean citizens have already invested a net $US9.7 billion into these single-stock leveraged ETFs.

Foreign investors have bought a net $US1.4 billion, according to abc.net.au.

The ability to leverage gains led to many investors making life-changing money.

We're talking tens of thousands of dollars, and in some cases, hundreds of thousands of dollars.

The KOSPI continued rising after the introduction of leveraged single-stock ETFs until it peaked on 19 June.

Then came the fall.

A cataclysmic 44% dive in just five weeks.

Suddenly, a bear wanders into the tent

As is inevitable after a period of crazy growth, the KOSPI got the wobbles in late June.

Investors became worried about high stock valuations and the sustainability of massive AI capex spending.

The KOSPI reversed course dramatically on 23 June, falling 10% in one day.

That was driven by a 12% plunge for both SK Hynix and Samsung Electronics shares.

The next day, AI-related stocks in the US followed suit.

Micron Technology Inc dropped 13%, Advanced Micro Devices Inc fell 6%, and Nvidia shares fell 4%.

The sell-off on US markets enhanced the panic in South Korea, and a five-week sell-off ensued.

Since then, SK Hynix shares have lost almost half their value, and Samsung shares are down 32%.

Angel Zhong, a finance professor at RMIT University who specialises in global financial markets, behaviour and trends, said the KOSPI's sell-off shows how quickly market optimism can turn.

What we're seeing in South Korea is a reminder of how quickly technology narratives can translate into market enthusiasm, and how quickly that enthusiasm can reverse. 

The AI revolution is creating genuine economic opportunities, but markets often price in expectations long before those benefits are fully realised. 

Profit-taking wasn't all that dragged the KOSPI into a bear market last month.

Investors who were late to the KOSPI party, sitting on smaller capital gains that were wiped out within days, received margin calls.

ABC reported Goldman Sachs estimates of more than 1.2 million margin calls and 360,000 forced account closures as of a fortnight ago.

A margin call occurs when your investment's value falls below your broker's required margin.

Typically, the broker asks for cash to make up the difference, and if you can't pay, they can sell your shares down.

So, forced sales also contributed to the KOSPI's market crash.

What now?

ASX investors who hold SK Hynix and Samsung shares directly obviously felt the impact.

Other Aussie investors felt it through the iShares MSCI South Korea AUD ETF (ASX: IKO), which was the best performer of FY26.

The IKO ETF unit price fell 36% during the KOSPI crash.

Since bottoming out on 29 July, the KOSPI has recovered 13%. IKO ETF has also rebounded 16%.

Zhong explained the lesson:

Investors should be careful not to mistake a correction in market sentiment for a failure of underlying technology.

AI will continue to transform industries, but markets often move through cycles of exuberance and reassessment. 

Meanwhile, South Korea's finance ministry has said it will move to limit access to leveraged ETFs.

The post Imagine the ASX 200 near-tripling in a year. That's what the KOSPI did in FY26 appeared first on The Motley Fool Australia.