Gradually break away from fundamentals! Is the “epic bull market” in South Korea’s stock market over under strong supervision?
The global stock market is experiencing a compound super stress test of "large-scale escalation of geopolitical conflicts in the Middle East, superimposed return of energy inflation, and deleveraging of AI computing power momentum." Currently, the Philadelphia Semiconductor Index has fallen by more than 20% from its June high and has officially entered a technical bear market; the Korean stock market has become the "epicenter" of a major reversal in global AI computing power trading due to the excessive weight of memory chips, daily rebalancing of single-stock leveraged ETFs, and concentrated retail financing positions.
The global stock market is experiencing a compound super stress test of "large-scale escalation of geopolitical conflicts in the Middle East, superimposed return of energy inflation, and deleveraging of AI computing power momentum." Currently, the Philadelphia Semiconductor Index has fallen by more than 20% from its June high and has officially entered a technical bear market; the Korean stock market has become the "epicenter" of a major reversal in global AI computing power trading due to the excessive weight of memory chips, daily rebalancing of single-stock leveraged ETFs, and concentrated retail financing positions. Billions of dollars in leveraged bets on South Korea's artificial intelligence (AI) have twisted the South Korean market, once seen as a "reliable barometer of global growth," into a crazy "casino," confusing regulators and investors alike. This has not only wreaked havoc on the investment portfolios of various institutions, but also greatly distorted global investors’ views on the Korean stock market, because South Korea is also one of the core areas of the global AI boom and this round of AI stock rises. Korean stock market volatility intensifies, deviating from fundamentals 2026 is the year of the circuit breaker for the Korean stock market. More than half of all times in South Korea's history that the benchmark Korea Composite Stock Price Index (KOSPI) triggered the circuit breaker mechanism occurred in the first six months of this year. In December 1997, the Korea Exchange (KRX) officially launched the index circuit breaker mechanism, becoming the first market in Asia to introduce an "index-level trading suspension" to prevent panic stampedes, restore liquidity and give the market a cooling-off period. At the beginning of 1997, the rules of the Korean stock market generally imitated the U.S. stock market, setting up a simple three-level circuit breaker: the first level KOSPI fell by more than 7% and was suspended for 20 minutes; the second level fell by more than 12% and was suspended for another 20 minutes; the third level fell by more than 15% and the market was closed for the day. Alexander Redman, chief equity strategist at CLSA, said, "The trend of the KOSPI index has been decoupled from all historical driving factors in South Korea. South Korea is an easy market for strategic investors to enter. Therefore, many global strategic investors have invested in the Korean stock market for a long time and chose entry and exit points." But so far this year, he said, that traditional relationship has broken down, and the main driver of South Korea's stock prices is now capital flows from the explosion of single-stock leveraged funds, which promise to expand returns but increase volatility. The main holdings of these funds are chip manufacturers Samsung Electronics and SK Hynix, which are big winners in the AI super cycle and currently account for more than half of the weight of the South Korea Composite Stock Price Index. Redman added that based on this, South Korea's stock market has deviated from fundamentals, neither pricing in the future earnings of companies in the various industries covered by the stock index, nor responding to the usually reliable economic and stock market correlations. Even the KOSPI index, which used to track the trend of the US benchmark stock index, has now begun to influence the trend of Wall Street and US stocks. "After doubling in the market value of the KOSPI index in the first six months of this year, it has deteriorated sharply and has fallen 20% so far this month. In the past, investors would be very worried if the Korean stock market fell 7% in a day, but now this has become more and more normal. This makes institutional investors increasingly worried." He said. Mixed blessings and sorrows under strong supervision South Korean retail investors are expected to receive 34.37 trillion won ($23 billion) in margin loans this week, slightly below the record of 38.6 trillion won set in June. The market expects that whether the Korean stock market can rebound next depends not only on the scale of investors borrowing cash, but also on concentrated bets made through leveraged single ETFs. A leveraged fund listed in Hong Kong, China, that tracks SK Hynix has increased more than 20 times since the beginning of the year, reaching a scale of US$7.78 billion, becoming one of the largest ETFs among such funds in the world. Based on this, the amount of rebalancing funds is enough to tilt the market. Florian Neto, head of Asia investment at Amundi, said, "The trading volume of some single-name leveraged ETFs is four times the average trading volume of their underlying stocks. When assets under management surge, we see the limitations of increasing leverage on single stocks, which gives us some warning signs."
Faced with increasing market volatility and growing investor doubts, South Korean regulatory agencies began to take action. The Financial Services Commission of South Korea (FSC) announced on July 16 that it would temporarily suspend listing applications for new single-stock leveraged ETF products. In addition, South Korean regulatory authorities have significantly raised the investment threshold, stipulating that from August 5, the minimum cash deposit requirements for investing in domestic and overseas single stock leveraged products will triple, from the original 10 million won to 30 million won. In addition, the prepayment determination rules have also been significantly tightened. In the future, the official will only recognize cash, and conversion methods such as substitute securities will no longer be recognized, thereby directly filtering out ordinary retail investors with low risk tolerance. Mike Sell, global head of emerging market equities at asset management company Alquity, said, "Everyone has discovered that the volatility in the Korean stock market has been very crazy recently. Therefore, any measures to restore focus on fundamentals will be welcomed by global investors. We believe that bringing the market back to rationality is positive for long-term investors." "Speculative capital is actually bringing permanent changes to companies," said Michael Green, chief strategist and portfolio manager at Simplify Asset Management. According to a survey by Bank of America fund managers, investors believe that the AI bubble is the biggest tail risk facing the market, and they took the lead in taking action in the Korean market. Damien Boey, portfolio strategist at Wilson Asset Management, said, "This applies to all investors around the world. Among them, we are very concerned about what is happening in South Korea. For a period of time, corporate earnings growth has continued and leveraged investors have won, causing the Korean stock market to soar. But recent market behavior tells us that the story may not be that simple." However, Mike Shao, chief investment officer of Invesco Asia (excluding Japan), told China Business News that the performance of the Korean stock market this year has benefited from the continued strong performance of semiconductors and AI-related supply chains, as well as the recovery of memory chips and improved export momentum. The AI-driven semiconductor cycle is expected to continue to be a key structural growth driver in the second half of 2026, and South Korea will continue to be a major beneficiary with its dominant position in the global semiconductor value chain. Looking forward, continued investment in data centers and the accelerated implementation of enterprise-level AI applications are expected to continue to be important drivers of growth. Even from a capital flow perspective, he said, "Liquidity conditions within the Asia-Pacific region remain positive. South Korea continues to attract solid foreign capital inflows, supported by AI-driven investment demand and improving corporate fundamentals, while local capital participation also remains strong. Overall, strong local capital flows combined with active capital markets help increase market depth and maintain overall liquidity levels in Asia."
Faced with increasing market volatility and growing investor doubts, South Korean regulatory agencies began to take action. The Financial Services Commission of South Korea (FSC) announced on July 16 that it would temporarily suspend listing applications for new single-stock leveraged ETF products. In addition, South Korean regulatory authorities have significantly raised the investment threshold, stipulating that from August 5, the minimum cash deposit requirements for investing in domestic and overseas single stock leveraged products will triple, from the original 10 million won to 30 million won. In addition, the prepayment determination rules have also been significantly tightened. In the future, the official will only recognize cash, and conversion methods such as substitute securities will no longer be recognized, thereby directly filtering out ordinary retail investors with low risk tolerance. Mike Sell, global head of emerging market equities at asset management company Alquity, said, "Everyone has discovered that the volatility in the Korean stock market has been very crazy recently. Therefore, any measures to restore focus on fundamentals will be welcomed by global investors. We believe that bringing the market back to rationality is positive for long-term investors." "Speculative capital is actually bringing permanent changes to companies," said Michael Green, chief strategist and portfolio manager at Simplify Asset Management. According to a survey by Bank of America fund managers, investors believe that the AI bubble is the biggest tail risk facing the market, and they took the lead in taking action in the Korean market. Damien Boey, portfolio strategist at Wilson Asset Management, said, "This applies to all investors around the world. Among them, we are very concerned about what is happening in South Korea. For a period of time, corporate earnings growth has continued and leveraged investors have won, causing the Korean stock market to soar. But recent market behavior tells us that the story may not be that simple." However, Mike Shao, chief investment officer of Invesco Asia (excluding Japan), told China Business News that the performance of the Korean stock market this year has benefited from the continued strong performance of semiconductors and AI-related supply chains, as well as the recovery of memory chips and improved export momentum. The AI-driven semiconductor cycle is expected to continue to be a key structural growth driver in the second half of 2026, and South Korea will continue to be a major beneficiary with its dominant position in the global semiconductor value chain. Looking forward, continued investment in data centers and the accelerated implementation of enterprise-level AI applications are expected to continue to be important drivers of growth. Even from a capital flow perspective, he said, "Liquidity conditions within the Asia-Pacific region remain positive. South Korea continues to attract solid foreign capital inflows, supported by AI-driven investment demand and improving corporate fundamentals, while local capital participation also remains strong. Overall, strong local capital flows combined with active capital markets help increase market depth and maintain overall liquidity levels in Asia."