The benchmark KOSPI index has recovered nearly all of last month’s 19% decline, regaining momentum after being one of the world’s top-performing major indices last year. The rebound has been supported by renewed foreign inflows, with $4.2 billion returning to equities in April after record outflows of $23.8 billion in March, according to LSEG data.

Investor interest has been driven in part by the global surge in demand for high-bandwidth memory used in data centres, benefiting major South Korean chipmakers such as Samsung Electronics. Market participants said the March correction created attractive entry points, prompting portfolio reallocations into Korean technology stocks.

“We’re cautiously optimistic, but we think it’s a megatrend,” said Isaac Thong, senior investment director for Asian equities at Aberdeen Investments, referring to the long-term growth potential of AI-linked semiconductor demand.Despite the recovery, the recent market turmoil has exposed structural vulnerabilities.

South Korea’s equity market remains heavily concentrated in a small number of AI-linked firms, amplifying swings during periods of global uncertainty. Since the onset of the Iran war, the KOSPI has experienced sharp daily fluctuations, including declines of up to 12% and gains of 9%, outpacing volatility seen in other Asian and U.S. markets.

The South Korean won has remained near 17-year lows against the U.S. dollar, increasing the cost of energy imports and complicating policy responses. Authorities face a balancing act as measures to support growth risk fuelling inflation, particularly in an economy highly dependent on imported energy.

Government efforts to address the so-called “Korea discount” through corporate governance reforms have begun to attract activist investors, aiming to narrow valuation gaps linked to longstanding concerns over transparency and shareholder rights within family-run conglomerates.While equities have been volatile, South Korea’s bond market has shown resilience.

Companies raised $74.7 billion in the first quarter, maintaining strong issuance levels, while the benchmark 10-year government bond yield has declined this month to its lowest level since February.

Prospects for sovereign debt have improved further with anticipated inclusion in FTSE’s World Government Bond Index, prompting early inflows from major institutional investors including Japan’s Government Pension Investment Fund, alongside interest from global asset managers such as Goldman Sachs Asset Management and Principal Global Investors.

Analysts estimate that index inclusion could drive between $50 billion and $70 billion in passive fund inflows, reinforcing demand for Korean bonds even as equity markets remain sensitive to external shocks.

However, continued weakness in the won remains a key concern for global investors, with capital outflows and safe-haven demand for the dollar keeping the currency near levels last seen during past financial crises.

Authorities have responded with verbal interventions and strategic hedging operations by the state pension fund to stabilise the currency.

The shift marks a departure from earlier market resilience, with traders now pricing in longer-term disruptions to energy supply chains and global trade flows. Analysts said the reassessment reflects growing concern that the conflict could inflict sustained economic damage rather than remain a short-lived shock.

Global equities extended losses, with the S&P 500 falling 1.5% on Friday as major technology firms led declines, while futures dropped a further 0.6% in Asian trading. Japan’s Nikkei 225 slid 3.5%, and China’s CSI 300 Index was on track for its steepest losses since tariff-driven market turmoil last year.

MSCI’s global equities gauge, the MSCI World Index, hit a four-month low on Monday after breaking below its 200-day moving average, a key technical level closely watched by investors.

Market participants said the selloff reflected waning confidence in valuations following a rally that had been underpinned by expectations of limited geopolitical fallout.

Investors are increasing cash holdings and reducing leveraged positions across major markets, according to fund managers. The reallocation reflects a broader move to hedge against prolonged instability, with energy stocks emerging as relative beneficiaries amid expectations of tighter supply.

Aaron Costello, head of Asia at Cambridge Associates, said markets had previously been conditioned to expect rapid reversals in geopolitical tensions but were now adjusting to the likelihood of escalation. Speaking at a Milken Institute event in Hong Kong, he said investors were beginning to factor in the depletion of reserves and stockpiles if the conflict persists.

Karen Jorritsma, head of Australian equities at RBC Capital Markets, said the speed of the selloff pointed to weak conviction behind earlier gains, with investors exiting positions quickly as risks mount.

Damage to critical energy infrastructure and supply routes is reinforcing expectations of lasting economic impact. Investors are closely monitoring developments around the Strait of Hormuz, a key artery for global oil shipments, as tensions raise the risk of prolonged supply constraints.

Recent disruptions have already affected liquefied natural gas flows, with nearly a fifth of Qatar’s export capacity reportedly knocked out by Iranian attacks, according to statements cited by Reuters last week. Market participants said such disruptions could have multi-year implications for contracts and pricing if sustained.

The prospect of continued supply shocks has led investors to reassess the effectiveness of potential policy responses, including interest rate cuts or diplomatic shifts, in offsetting the broader economic fallout.