Korean AI stocks frequently rise and fall sharply, highlighting the power of excessive leverage expansion
South Korea’s AI-driven stock market boom is turning into a cautionary tale about what happens when leverage becomes a more powerful market force than fundamentals. What started as a global reassessment of AI valuations turned into a market rout after SK Hynix plunged a record 15% on Monday, forcing managers of leveraged products tied to the South Korean chipmaker to sell billions of dollars in shares. The sell-off helped push South Korea's Kospi index down 25% in just three weeks, exposing how margin loans, individual leveraged exchange-traded funds (ETFs) and concentrated index weightings interact to amplify the market's two-way swings. Beyond Seoul, the rest of the world is increasingly paying attention to these developments. South Korea is at the center of the AI hardware supply chain, with SK Hynix and Samsung Electronics accounting for more than half of the weight in the Kospi index. Now that SK Hynix can trade in the U.S. market through American depositary receipts, investors say market sentiment may fluctuate between Wall Street and Asia around the clock, increasing the risk that market volatility caused by South Korea's leverage will spread globally. That feedback loop was playing out again on Wednesday, with the Kospi rising more than 7%, led by a rebound in SK Hynix shares after the company's ADRs rose 27%. "The South Korean semiconductor sector narrative is based on real structural demand, but the unbridled pursuit of leverage has pushed market trading in a more fragile direction," said Hebe Chen, senior market analyst at Vantage Global Prime in Sydney. “The double-edged sword effect is now working in reverse on the market, with leverage making the downside just as powerful as the upside.” Single-stock leveraged ETFs are relatively new in Asia. CSOP SK Hynix Daily Leverage (2x) product was launched in Hong Kong in October and quickly developed into the largest product of its kind in the world. In Seoul, more than a dozen individual leveraged products tracking SK Hynix and Samsung were launched in late May, often providing double the returns of their underlying stocks. The total assets under management across these products exceed $14 billion. The amplification effect of leveraged ETFs was clearly demonstrated this week. According to The group's sales and trading unit for institutional clients reported that SK Hynix's share price plummeted by double digits on Monday, which means that related funds may have to sell about $5 billion of the company's shares to rebalance their portfolios in accordance with their investment guidelines. The report stated that this scale accounted for approximately 18% of the total trading volume of SK Hynix stocks and stock futures on the day. This type of trading, which is driven by capital flows and lacks fundamental catalysts, can lead to significant losses for local retail investors, who tend to hold stocks longer than the designed period of these leveraged products. Prices of a dozen leveraged ETFs tracking the two memory chip makers have also plunged about 40% since their listings in Seoul in May, according to data compiled by Bloomberg. Recommended reading: AI bets drive the rapid expansion of leveraged ETFs, causing violent fluctuations in global markets South Korean regulators are now faced with the task of containing such volatility without unduly disrupting the country's financial markets. The country's top financial regulator expressed regret last month over approving the listings, perhaps a sign of future policy direction. South Korean presidential policy director Kim Yong-beom told reporters last week that South Korean authorities are paying close attention to the impact of individual leveraged ETFs and will discuss and decide whether further measures are needed. "There's not much they can do without disrupting the market structure, but they are expected to increase investor education, limit leverage and possibly reduce the leverage limit from 2 times to 1.5 times," said Jon Withaar, a portfolio manager at Pictet Asset Management in Singapore. "However, it should be noted that there are some leveraged ETFs in both Hong Kong and the United States, and these ETFs are not within their jurisdiction." Increased volatility caused by leveraged ETFs risks triggering margin calls, which in turn intensifies the sell-off. South Korea's total margin loans, borrowings for stock trading, peaked at more than 38 trillion won ($25.4 billion) in June and stood at 34.8 trillion won as of Monday.
There is also a risk that the sell-off in New York could affect moves in Seoul, with leveraged ETFs and margin calls amplifying the moves and then feeding back into U.S. trading hours, creating a nearly 24-hour feedback loop. "Such speculative products will end in pain sooner or later because the situation reverses," said Aadil Ebrahim, head of equities at Klay Group in Singapore. "We're going through a tough moment right now where these leveraged ETFs are being forced down as the underlying assets weaken," he said. "But nothing has changed in the fundamentals of the company."
There is also a risk that the sell-off in New York could affect moves in Seoul, with leveraged ETFs and margin calls amplifying the moves and then feeding back into U.S. trading hours, creating a nearly 24-hour feedback loop. "Such speculative products will end in pain sooner or later because the situation reverses," said Aadil Ebrahim, head of equities at Klay Group in Singapore. "We're going through a tough moment right now where these leveraged ETFs are being forced down as the underlying assets weaken," he said. "But nothing has changed in the fundamentals of the company."