Summary of Key Points
On Wednesday, the South Korean stock market once again triggered a rise-based circuit breaker (a safety mechanism) due to the soaring prices of storage giants, continuing its aggressive upward trend for two consecutive days. The process of "borrowing money to trade stocks" (leverage reduction), which previously caused a significant decline in the market, is nearing its end, with the balance of margin trading dropping significantly. Wall Street investment banks collectively believe that the selling pressure on South Korean stocks has largely subsided and have set optimistic target prices. Regulators are accelerating efforts to address leveraged ETFs, which have been exacerbating market volatility. Storage companies have become the main drivers of the market gains, with both the performance of U.S. stocks and news of SK Hynix's acquisition contributing to the upward movement.
1. South Korean Stocks Experience a "Brake" for Two Consecutive Days, but Volatility Remains
On Wednesday, South Korean stocks opened up 4.5% and later rose to 5.53%, briefly exceeding 6% before triggering the circuit breaker—a type of "emergency brake" for the market. This mechanism is designed to prevent excessive price increases by automatically halting automated buying when the KOSPI200 futures index rises more than 5% and persists for one minute. It's noteworthy that this was the second consecutive day the market used this safety measure; with another trigger on Monday, there have been three instances in just three days, indicating particularly high volatility.
2. Less People Borrowing Money to Trade Stocks, Meaning the Decline May Stop
A major factor behind the previous market downturn was the widespread use of leverage. Many investors borrowed money to buy stocks, which forced them to sell when prices fell, exacerbating the decline. The process of reducing leverage is now coming to an end. As of July 20, the outstanding balance of margin trading had dropped to 33.33 trillion Korean won (about 151.7 billion yuan), the lowest level since April, a decrease of 13.6% from the peak in June. In simple terms, with less borrowed capital, the pressure on the market is decreasing, making it more likely for stocks to rebound.
3. Wall Street Powerhouses Collectively Predict a Bottoming Out
Several major investment banks believe that South Korean stocks have hit a bottom:
- JPMorgan Chase: Maintains a "overweight" recommendation, targeting a price of 12,500 points (currently around 7,100 points), suggesting that the recent decline was a "cleaning process" to remove less confident investors and not the end of a bull market.
- Citibank: Says the selling pressure is nearly gone and targets a price of 10,000 points.
- Morgan Stanley: Still targets 9,000 points but has lowered its worst-case estimate to 6,000 points, predicting that prices will fluctuate between 6,000 and 9,000 points over the next 3-6 months. These views have provided some comfort to market participants.
4. Regulators Urgently Addressing Leveraged ETFs to Control Market Instability
What are leveraged ETFs? They use borrowed money to amplify investment returns, leading to larger gains and losses during price movements, which can increase market volatility. South Korean President Lee Jae-myeong asked regulators to address this issue promptly, stating that such funds have contributed to market instability. The Financial Committee acted swiftly, implementing measures from last week, such as raising the minimum deposit required to buy leveraged ETFs and changing the trading unit size from 1 share to 20 shares (making them unaffordable for small investors), as well as suspending the issuance and promotion of new leveraged ETFs. These actions aim to reduce market volatility.
5. Storage Companies Lead the Market Upward
The main drivers of the recent rise in South Korean stocks have been storage giants SK Hynix and Samsung Electronics: SK Hynix gained nearly 9%, while Samsung rose more than 6%. There are two reasons for this:
- Impact from U.S. markets: Storage stocks on the U.S. stock market saw strong gains overnight, with the Roundhill Storage ETF rising 10.91% and Micron Technology increasing by 12.17%, prompting a corresponding rise in South Korean stocks.
- Positive News: SK Hynix is in talks with Intel about acquiring a semiconductor facility in Ohio, USA, with plans to produce storage chips within five years—a major development that has boosted investor optimism. As heavyweight components of the market, the performance of these companies significantly influences the overall index.
In summary, South Korean stocks are currently in a phase of rebounding while still experiencing volatility. Storage companies are leading the market, and although the process of reducing leverage is nearly complete and institutional investors are optimistic, regulators are still working to control sources of market instability. The future direction of the market will depend on the performance of the storage industry and overall market sentiment.