① In July, South Korea's stock market experienced sharp volatility due to frequent leveraged trading and repeated circuit breakers, with the KOSPI index having fallen by one-third from its all-time high; ② Several Wall Street investment banks now see an improved outlook for South Korean equities, as the wave of deleveraging appears to be nearing its end and growth momentum among major Korean semiconductor manufacturers remains solid; ③ According to JPMorgan data, deleveraging in Korean equity leveraged ETFs is largely complete, and hedge funds have finished approximately 90% of their deleveraging process.
In July this year, South Korea’s stock market was likely one of the most closely watched regional markets globally—experiencing sharp daily swings, with trading halts becoming almost routine.
Now, as the KOSPI index has tumbled nearly one-third from its record high and local investors are reeling from losses, several Wall Street investment banks are beginning to express renewed confidence in the outlook for South Korean equities. They argue that the growth trajectory of major Korean chipmakers remains robust and that the intense wave of market deleveraging may be drawing to a close.
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According to JPMorgan research, assets in leveraged exchange-traded funds (ETFs) tracking South Korean stocks—such as Samsung Electronics and SK Hynix—plummeted from USD 50 billion at the end of June to USD 17 billion last week.
“This was a leverage event, not an earnings event,” said Steve Lawrence, Chief Investment Officer at Balfour Capital Group, which manages EUR 400 million in assets.
“Frankly, I’m bullish on Samsung. It was sold off largely because it accounts for half the index weight—not because there was anything wrong with the underlying business performance.”
Lawrence manages assets exceeding EUR 400 million.
“The narrative around the memory cycle and AI-related capital expenditure remains intact, and the current sell-off is occurring at prices below fundamental valuations.”
In fact, shifts in foreign investor sentiment appear evident from recent capital flows: On Friday last week, during a record-breaking rally in South Korea’s stock market, foreign investors ended their net selling streak—which had persisted since the beginning of the year—and instead bought KRW 7.2 trillion (approximately USD 5 billion) worth of South Korean equities, more than double the previous single-day record.
Deleveraging is nearing completion.
Wall Street analysts noted that the recent accelerated decline in South Korean equities was also driven by the collapse of hedge fund 'Situational Awareness.' However, this shock appears to have largely subsided, as the majority of the fund's equity portfolio has already been sold to Citadel, led by Ken Griffin—often dubbed the 'top hedge fund manager.'
According to data released by analytics firm EPFR, the average allocation to South Korea by actively managed global emerging market funds has risen steadily over the past 18 months, but declined notably in June amid heightened volatility in Korean equities.
Rajiv Batra, JPMorgan analyst and Co-Head of Asia and Global Emerging Markets Equity Strategy, stated:
“We believe that deleveraging of South Korea’s leveraged ETFs is largely complete, and hedge funds have already completed approximately 90% of their deleveraging, returning to acceptable levels.”
They noted in their report: “If a sustainable bottom forms here, historical data suggests there is support at this level.”
Typically, emerging markets deliver an average 12-month return of around 28% following adjustments.
Leveraged trading is the primary culprit.
Leveraged trading has remained at the center of attention throughout the recent sharp rally and subsequent sharp correction in South Korea’s stock market—particularly with the launch of single-stock leveraged ETFs, which not only reshaped market dynamics but also significantly amplified market volatility.
Since South Korea introduced single-stock leveraged ETFs in May, its stock market peaked rapidly in June—following a more than doubling of the KOSPI index over the preceding 12 months. However, after the market surged sharply, it was quickly followed by a cliff-like plunge.
“Long-only investors simply wouldn’t be willing to manage positions in stocks as volatile as these,” said William Brattan, Head of Asia-Pacific Cash Equity Research at BNP Paribas.
Last week, Citigroup’s trading strategy division estimated that retail investors in South Korea have incurred total losses of approximately USD 38.7 billion in leveraged ETFs.
“The scale of inflows into SK Hynix and Samsung is staggering. With a large number of new brokerage accounts in Korea, high local leverage, concentrated holdings, and sizable offshore 2x leveraged ETFs, it’s practically a disaster waiting to happen,” said Pierre Hoebrechts, Deputy Chief Investment Officer at Hong Kong-based East Eagle Asset Management.
Hobrechts stated that since the end of June, his firm has held short positions betting on declines in both South Korea’s KOSPI index and Japan’s Nikkei 225 index, but closed these positions last week, believing the market correction phase may be nearing its end.
According to S3 Partners, South Korea’s average short interest (value-weighted) stands at approximately 4.3%, down from a recent peak of around 5.3%.
Of course, significant risks remain in the South Korean equity market.
Last Friday, the KOSPI posted its largest single-day gain in history at 17.9%—a move that unsettled many investors just as much as the index’s steep daily declines the previous month. On Monday of this week, the index fell nearly 5%.
However, Larry Hatheway, Head of Research at Franklin Templeton Institute, noted that although he remains cautious about entering a declining market, they “might be willing to reconsider some of these [Korean] stocks.”