Summary of the Core Content
This news report discusses how the South Korean stock market experienced a "best summer" due to the AI-driven growth in the storage industry (with Samsung and SK Hynix posting substantial profits). However, after regulators introduced local single-stock leveraged ETFs to retain capital, retail investors flocked in, taking on high levels of leverage. Subsequently, the withdrawal of foreign funds triggered a chain reaction that led to a sharp market crash, with many leveraged accounts experiencing margin calls, forcing the authorities to intervene urgently. Behind this phenomenon lies South Korean society's anxiety about rapid wealth accumulation within a compressed timeframe. Young people hope to use leverage to accelerate what would normally take 14 years (such as buying a house) but risk losing all their capital due to the double-edged nature of leverage.
Detailed Analysis
Why Did Regulators Approve Leveraged ETFs?
During this period in the storage industry, Samsung and SK Hynix reaped huge profits, attracting many South Koreans who wanted to invest in their stocks through leveraged products. The United States and Hong Kong already offered leveraged ETFs that allowed investors to bet twice as much on Samsung's stock price. If South Koreans could directly purchase these ETFs abroad, it would have led to capital outflows and a depreciation of the won (along with reduced trading volume and fees for the Korean government).
To address these concerns, regulators revised the rules: previously, ETFs were required to hold at least 10 different assets; now, single-stock leveraged ETFs (with a maximum two-fold leverage) are permitted. They also imposed requirements, such as a minimum account balance of 10 million won and a two-hour training course on the risks of leverage. However, these measures proved ineffective in stopping investors. Training websites were overwhelmed, with 350,000 people completing the course in just a few days, and the trading volume of the new products reached 28 trillion won within three days—five and a half times their net asset value. Regulators later admitted they regretted the decision, as the negative consequences outweighed the benefits of retaining capital.
Young Investors and Leverage
A 24-year-old named Lee Seung-ho is a typical example: he saved 20 million won through military service and used five-fold leverage to invest in Samsung stocks, only to lose all his money due to a margin call. He wants to try again because a apartment in Seoul costs him 14 years of salary, which he cannot afford on his salary alone. Leverage seems to offer the possibility of accelerating a 14-year process into just a few months.
In South Korea, there is a phenomenon called "sudden poverty" (a sudden increase in wealth disparity), where those without assets find themselves falling further behind those with them as housing and stock prices rise. The success stories of Samsung and SK Hynix in the AI sector are particularly compelling, leading many to seek leverage to catch up on lost gains, especially those who entered the market later.
What Happened When Foreign Funds Withdrawed?
Samsung and SK Hynix account for half of the South Korean stock market's value, making them crucial components of foreign investor portfolios. When foreign funds started selling (a total of $70.8 billion in the first half of the year, with another $12.6 billion withdrawn in June), it had a significant impact on the market:
- Stock prices dropped.
- Leveraged ETFs were forced to reduce their holdings to maintain the desired leverage ratio.
- Margin calls triggered by these sales led to forced liquidations by brokerages.
- This further exacerbated the market decline, creating a vicious cycle: selling → price drops → more forced liquidations → even greater declines.
Even despite Samsung's impressive earnings (a 19-fold increase in profits in the second quarter), this did not stop the selling pressure, with the stock price still falling by 6.9% on the day of the earnings announcement.
Why Did Samsung's Stock Price Fall Despite Profit Growth?
Normally, stock prices reflect a company's fundamental strength. However, during a leveraged market, factors such as brokerages' forced liquidations and ETFs' need to adjust their portfolios take precedence over a company's financial performance. Investors are forced to sell regardless of the company's actual profitability.
The core issue shifted from whether AI will continue to develop to who is still willing to buy South Korean stocks. While fundamental analysis can determine a company's long-term value, in the short term, leveraged investors' inability to meet margin requirements and ETFs' need to reduce holdings overwhelm any positive market momentum. As a result, even strong companies like Samsung cannot prevent their stock prices from falling.
South Korean Society's Anxiety for Rapid Change
South Korean sociologists describe the country as experiencing "compressed modernity"—achieving in decades what other countries take generations to accomplish (industrialization and urbanization). This trend has manifested in the financial market, where investors try to compress several years of growth into a few months through leverage. They are buying into South Korea's best companies but do so with limited capital and late entry, relying on leverage to make up for it. However, leverage is a double-edged sword: while it can speed up gains, it also increases the risk of losing everything if things go wrong.
Conclusion
The cooling of the South Korean stock market summer is not due to a decline in AI technology but rather the collapse of the leveraged investment strategy driven by the desire for quick wealth accumulation. Good companies can wait, but leveraged investors cannot afford to wait.