Summary of Key Points
In the first half of this year, the South Korean stock market soared due to factors such as the AI boom, the president's promotion of stock market reforms, and regulatory plans for leveraged ETFs. Retail investors flocked to the market, some even using leverage (borrowing money or mortgaging property to trade stocks). However, starting in mid-June, the market plummeted from its highs. The "doubling risk" associated with leveraged ETFs triggered a vicious cycle of decline, leading to forced liquidations and further losses. Retail investors suffered total losses exceeding 10.2 billion yuan. Now, their attitude has shifted from frenzy to reflection, with their trading volume declining and foreign capital taking the lead. It will take time for market confidence to recover, and the future direction depends on regulatory policies and the macroeconomic environment.
I. The "National Stock Trading" Frenzy in the First Half of the Year: A Tripartite Drive from Policy, AI Interest, and Wealth Effect
The surge in the South Korean stock market in the first half was not accidental; it was the result of three combined factors:
1. Policy Momentum: President Lee Jae-myeong strongly advocated for stock market reforms, and regulatory authorities planned to introduce leveraged ETFs on companies like Samsung and SK Hynix (which allow investors to use funds effectively as if they had double the value). The aim was to keep money that would otherwise flow abroad within the country.
2. AI Momentum: Semiconductors, a core component of AI, made Samsung and SK Hynix highly sought-after assets. Retail investors feared missing out on the potential for rapid wealth growth through these stocks and flocked to buy them.
3. Wealth Effect: Stories of people making money were everywhere—70-year-old aunts transferred their fixed deposits to the stock market, 50-year-olds opened accounts after colleagues discussed stocks, and even young people joined in. With declining real estate returns and low bank interest rates, the stock market became the only option for ordinary people to earn quick profits. Even high-interest bank deposits could not retain investors.
II. The "Accelerator" of the Plunge: The Vicious Cycle of Leveraged ETFs
Leveraged ETFs are a double-edged sword; they can lead to substantial gains when markets rise but also massive losses when they fall. This market crash was particularly exacerbated by leveraged ETFs:
- The Trigger for the Panic: In June, the stock market dropped from over 9,000 points. Without other sectors providing support, the "passive selling mechanism" of leveraged ETFs came into effect: as the index fell, ETFs were forced to sell stocks to stop losses, which caused the index to drop even more, leading to more ETFs being liquidated and creating a vicious cycle.
- The Extent of Losses: Retail investors suffered approximately 2.15 trillion won (10.2 billion yuan) in total due to leveraged trading (depreciation of ETF net values, option losses, and debts to brokers). The KOSPI index plummeted by 38.6%, resulting in a market value reduction of 13.78 trillion yuan (more than South Korea's annual GDP), and the market even experienced two days of trading halts due to excessive declines.
- A More Illustrative Example: While the leveraged ETF on SK Hynix lost 33.8%, the underlying stock only fell by 6.8%—leverage amplified the risk by a factor of five!
III. A Major Shift in Retail Investor Attitudes: From Fanatic Following to Cautionary Reflection
The enthusiasm of retail investors has completely turned around:
- Previously: People were willing to mortgage their apartments to borrow up to 50 million won (240,000 yuan) to invest, with social media filled with discussions about rapid wealth through AI.
- Now: Those who lost all their money complain about not reading the risk terms, while those who avoided the market are relieved. Many investors have slowed down, no longer chasing hot stocks or using leverage, and some have even started shifting to more stable investments like savings or real estate. The market's fervor has cooled significantly.
- Analyst Observations: Colleagues who bought Samsung stocks sold them as soon as they made a small profit; those who lost money gathered to share their experiences, calling it a "lesson learned in blood."
IV. A Long Road to Regaining Confidence: A Changing Market and Blamed Regulations—What Lies Ahead?
The market crash has changed the composition of investors and retail investor confidence:
1. Shift in Market Composition: In the first half of the year, retail investors accounted for 46% of trading volume (with foreign capital at just 34%). Now, their share has dropped to 31.58%, with foreign capital taking the lead.
2. Regulatory Criticism: Measures to increase margin requirements and suspend new leveraged products were only introduced in mid-June, which investors viewed as too late. President Lee Jae-myeong's approval ratings also hit a low point during his tenure.
3. Future Trends: Institutions believe the fundamental logic behind AI remains valid, but it will take longer for retail investor confidence to recover than for the market to regain its previous levels. In the short term, the market will remain cautious. The key will be whether regulators can address the shortcomings in risk warnings and whether the macroeconomic situation stabilizes.
In One Sentence
South Korean retail investors have learned a harsh lesson: leverage is a double-edged sword, and following trends blindly can lead to significant risks. When markets are hot, it's more important to consider what might happen if they fall than to focus solely on potential gains.