Summary of Key Points
Recently, global stock markets have been under triple pressure: escalating geopolitical conflicts in the Middle East, renewed energy inflation, and a tightening of leverage in investments related to AI computing power. The South Korean stock market, due to its high weight of memory chips, the rampant expansion of leveraged ETFs targeting individual stocks, and the concentration of retail investor financing, has become the “epicenter” of the reversal in AI computing power trading. It has experienced extreme volatility (with the number of circuit breakers triggered in the first half of this year exceeding half of the total in history) and has decoupled from fundamental factors such as corporate earnings and economic data. Regulatory authorities have stepped in to restrict leveraged products, but there is a divided opinion among institutions regarding its future direction: some fear a bubble may burst, while others are optimistic about the long-term potential of the AI semiconductor cycle.
Detailed Analysis
Why Has the South Korean Stock Market Become the “Eye of the Storm” for AI Trading Reversals?
The core issue in the South Korean stock market is the excessive leverage used in bets on AI computing power:
- High Chip Weight: Two memory chip giants, Samsung Electronics and SK Hynix, account for more than half of the weight of the KOSPI (the South Korean Composite Index). As key beneficiaries of the AI boom, they are particularly vulnerable to a reversal in AI investment sentiment.
- Uncontrolled Leveraged ETFs: For example, a leveraged fund tracking SK Hynix has increased in value by more than 20 times this year and has reached a size of $7.78 billion (one of the largest funds of its kind globally). These funds use leverage to buy more stocks and need to “rebalance” daily (increasing positions when prices fall and reducing them when prices rise), and their large scale can distort market prices.
- Concentration of Retail Financing: Retail investors have borrowed nearly a record amount of money for stock trading (34 trillion South Korean won, approximately $23 billion), with most of this capital focused on chip stocks. A market downturn could trigger a chain reaction of selling.
These factors combined have made the South Korean stock market the most volatile when AI computing power trading reverses.
Has the South Korean Stock Market Completely Lost Its Connection to Fundamentals?
Normal stock market movements should be linked to corporate earnings and economic data, but currently, the KOSPI has deviated significantly:
- Circuit Breakers Are the New Norm: In the first half of this year, the number of circuit breakers triggered on the KOSPI exceeded half of the total in history, with a 7% daily drop being nothing out of the ordinary.
- Deconnection from Traditional Logic: Strategists at Societe Generale believe that the KOSPI is no longer aligned with South Korea’s economic drivers; it neither reflects future corporate earnings nor follows economic data and even influences the U.S. stock market (previously, it moved in tandem with the U.S. market).
- Drastic Market Volatility: The market value of the KOSPI doubled in the first half of this year before falling by 20%, making it difficult for institutional investors to predict trends using conventional methods.
Have Regulatory Measures Helped Cool Down the Market?
In response to the extreme volatility, South Korean regulators have taken tough actions:
- Suspension of New Leveraged ETFs: No new leveraged ETFs targeting individual stocks are being approved to prevent the expansion of high-risk products.
- Raised Investment Requirements: Starting August 5th, the minimum deposit required to buy leveraged stock products increased from 10 million South Korean won (about $50,000) to 30 million South Korean won (about $150,000), and only cash can be used for purchases, excluding other securities. This directly excludes less financially capable retail investors.
Institutions generally support these measures; for instance, an Alquity executive stated that bringing the market back to a focus on fundamentals is beneficial for long-term investors.
Future Directions: Divided Opinions Among Institutions
There are contrasting views among institutions about the future of the South Korean stock market:
- Pessimists: A survey by a U.S. bank identifies the AI bubble as the biggest “black swan” risk, with the South Korean market being a focal point for this bubble. Strategists at Wilson Asset Management argue that the market’s recent volatility indicates that the story behind its growth (driven by leverage and earnings) is more complex than initially thought, and a bubble may be about to burst.
- Optimists: The Director of Investments at Invesco Asia believes that South Korea holds a dominant position in the global semiconductor supply chain, and the AI-driven semiconductor cycle will continue (e.g., due to investments in data centers and the adoption of AI by businesses). Additionally, there is ample liquidity in the Asia-Pacific region, with foreign capital still flowing into the market. In the long run, South Korea can benefit from the AI boom.
Conclusion
The chaos in the South Korean stock market is a result of excessive leverage speculation driven by the AI boom. While regulatory measures can help cool down the market in the short term, its long-term direction depends on whether the AI semiconductor cycle persists and whether the market can return to fundamentals. For individual investors, it is advisable to stay away from such a “casino-like” environment with high volatility.