Citi lowers South Korea to neutral, citing volatile trading conditions

SINGAPORE, July 20 (Reuters) - Citi cut South Korea to a tactical neutral after a year in the overweight category, as it looks to reduce exposure to the artificial intelligence theme due to the extreme volatility in chip stocks in recent weeks.

The KOSPI .KS11 has been the poster child of the wild AI trade that has seen it become the best-performing stock market in the world this year, but in recent weeks the market has been whacked by severe volatility due to retail enthusiasm for single-stock leveraged ETFs and valuation worries.

Here are some more details:

• Citi said nearly all of its client conversations are now returning to the likelihood of "broadening" performance in the second half of 2026 but it remains hesitant in fully rotating away from tech in its EM country allocation.
• Citi remains structurally bullish on the AI story, but moves to neutral on Korea, while upgrading China to overweight and remaining overweight on Taiwan markets.
• Yardeni Research also downgrades emerging markets to market weight, citing rising oil prices, strong dollar due to a hawkish Federal Reserve and AI fatigue showing up in South Korea and Taiwan.
• There has been quite a bit of rotation in leadership so far in July, Yardeni said, noting the countries that led the broader 2026 rally, South Korea and Taiwan, are the worst performers this month to date.
• South Korean stocks down 23% so far in July but remain up 55% this year, while Taiwan markets .TWII are down about 8% in the month but up 47% in 2026.