The Kospi's 4% drop on its first session back from Friday's holiday confirms the market is still working through the unwind of one of 2026's most crowded trades, and Citi's move to tactical neutral after a year of overweight adds an institutional signal to what has largely been a retail-driven rout. With Korean stocks down 23% in July alone but still up 55% year to date, the pullback looks more like a violent reset within a still-intact bull run than a structural breakdown, a framing consistent with Citi's decision to stay structurally bullish on AI overall while simply trimming Korea-specific exposure. The rotation Citi flagged, upgrading China to overweight while holding Taiwan at overweight, suggests investors are increasingly differentiating within the AI trade rather than abandoning it wholesale, with capital likely to keep shifting toward markets seen as less exposed to single-stock leverage and retail-driven volatility. For Korean equities specifically, the near-term path likely hinges on whether the leveraged ETF unwind has largely run its course or has further to go.---Earlier:South Korea to ease won access, aims for freely convertible currencyThe world's best-performing market this year just had its worst week in years catch up with it.Update .... down 5% now and the exchange has called in the Sidecar to halt program trading for 5 minutes. Summary:South Korea's Kospi fell 4% on Monday, its first session back after Friday's holidayCiti cut South Korea to tactical neutral, ending a year in the overweight category, as it looks to trim exposure to the AI theme given extreme volatility in chip stocks in recent weeksThe Kospi has been the best-performing stock market in the world this year but has been hit hard in recent weeks by retail enthusiasm for single-stock leveraged ETFs and valuation concerns, according to CitiCiti said nearly all client conversations now centre on the likelihood of broadening market performance in the second half of 2026, though it remains reluctant to fully rotate out of tech within its emerging market allocationCiti said it remains structurally bullish on the AI theme, moving Korea to neutral while upgrading China to overweight and keeping Taiwan at overweightSouth Korean stocks are down 23% so far in July but remain up 55% for the yearSouth Korea's Kospi fell 4% on Monday, its first trading session after returning from Friday's holiday, as the market continued to unwind one of the most crowded trades of 2026. The decline came as Citi cut South Korea to tactical neutral, ending a year-long overweight recommendation, as the bank looks to trim its exposure to the artificial intelligence theme given the extreme volatility that has hit chip stocks in recent weeks.The Kospi has been the emblematic winner of this year's AI trade, emerging as the best-performing major stock market in the world. But the same dynamics that fuelled its rise, concentrated bets on chipmakers and AI-adjacent names, have turned against it in recent weeks. Citi pointed to severe volatility driven by retail enthusiasm for single-stock leveraged ETFs, alongside growing valuation worries, as the key forces behind the reversal.Citi said nearly all of its client conversations are now centred on the likelihood of a broadening in market performance during the second half of 2026, a shift away from the narrow, AI-led leadership that has defined much of the year so far. Even so, the bank said it remains hesitant to fully rotate away from technology within its emerging market country allocation, framing the move on Korea as tactical rather than a broader retreat from the AI theme. Citi said it remains structurally bullish on artificial intelligence overall, choosing instead to differentiate within the region, upgrading China to overweight while keeping Taiwan at overweight alongside the downgrade of Korea.The scale of the recent reversal has been stark. South Korean stocks are down 23% so far in July, a sharp reversal for a market that remains up 55% for the year to date. That gap between the monthly decline and the still-substantial annual gain underscores how far and how fast the leveraged ETF unwind and chip stock volatility have moved prices, even as the broader AI investment theme that drove Korea's rally in the first place remains, in Citi's view, intact. This article was written by Eamonn Sheridan at investinglive.com.