Over the past few months the South Korean equity market has shifted sharply: the KOSPI, long considered a reliable gauge of global cyclical activity and the semiconductor cycle, is increasingly driven not by macro outlooks or company results but by leveraged retail trades, single-stock leveraged ETFs and concentrated speculative flows around Samsung Electronics and SK Hynix.
Rapid rally followed by a sharp correction
According to the source, the KOSPI roughly doubled in value over a six-month period, yet lost about 20 percent in the first half of July. In a short time the market therefore produced both historic rallies and a correction of bear-market magnitude. Volatility has surged: more than half of the trading halts tied to declines of at least 8 percent in the index’s history occurred in the past six months, and daily swings of 6–8 percent have become commonplace.
Market dominated by two stocks
A key distortion is concentration: Samsung Electronics and SK Hynix together now account for more than half of the KOSPI’s market capitalization, meaning their price moves largely determine the index’s direction. This concentration has a genuine fundamental basis: SK Hynix is a leading supplier of HBM (high bandwidth memory) chips used in AI datacenters, components that are critical for the operation of Nvidia and other accelerator chips. Rising demand for memory and datacenter investment has materially lifted profit expectations and market valuations for both SK Hynix and Samsung.
Self-reinforcing effect of leveraged ETFs
At the heart of the turbulence are single-stock leveraged ETFs that aim to deliver twice the daily performance of their underlying equity. Because they track daily returns, asset managers must rebalance at the end of each trading day to maintain the 2x exposure: buying additional stock or derivatives after rises and reducing exposure after falls. That rebalancing amplifies price moves in both directions. While a typical leveraged ETF is too small to move its underlying stock materially, the Korea-focused products expanded so fast that their daily rebalancing flows now influence the market.
As an example, a Hong Kong-listed ETF offering 2x exposure to SK Hynix grew more than twentyfold since the start of the year and had nearly $8 billion in assets under management by mid-July, making it the world’s largest single-stock leveraged fund. Some similar funds’ trading volumes reach multiples of the underlying stock’s average trade volume.
Surge in retail margin loans
Alongside leveraged ETFs, retail margin lending accelerated the rally. South Korean retail margin debt for stock purchases set a record in June at 38.6 trillion won; by mid-July the outstanding balance remained roughly equivalent to $23 billion. Leveraged retail positions increase buying power on the way up but can accelerate selling on the way down: falling prices trigger margin calls, forced liquidations by brokerages, further selling, and additional price declines.
Multiple negative feedback loops
Multiple negative feedback mechanisms are now operating simultaneously: leveraged ETFs reduce exposure, margin-financed retail positions are force-closed, and institutional investors may pull back risk-taking amid rising volatility. Earlier the same loops worked in reverse: rising prices attracted more ETF inflows, ETFs bought more stock, and the rally drew in more retail investors. The system functions while fresh capital keeps arriving; once the direction flips, the reinforcing mechanics rapidly magnify downside moves.
Regulatory moves
The South Korean financial regulator initially allowed domestic launches of single-stock leveraged ETFs, noting that Korean investors could access such products abroad. But demand and volatility rose so quickly that by July the regulator tightened rules: it halted new launches of single-stock leveraged ETFs and raised the minimum account balance required for trading from 10 million won to 30 million won starting in August. The restrictions also cover foreign-listed products. The regulator has been cautious because an overly aggressive intervention could trigger mass liquidations and further market declines; its current approach aims primarily to slow new capital inflows rather than force the unwinding of existing positions.
Low P/E, but not a simple buy signal
After the correction, the forward P/E for Samsung and SK Hynix fell below 5, which superficially looks very cheap. However, in cyclical industries low P/E ratios are not necessarily a buy signal: companies often appear cheapest at the peak of the profit cycle, and if earnings later fall the multiple can rise swiftly. Investors therefore need to separate three narratives: the long-term AI growth story, the cyclical earnings expansion in the memory market, and the short-term speculation driven by leveraged products. The first two are analyzable on fundamentals; the third works only as long as investors keep increasing leverage.
A warning for the AI sector
The South Korean experience does not prove the AI thesis is invalid — demand for chips remains strong and Samsung and SK Hynix retain leading technology positions. But it shows that even a robust fundamental growth story can become a risky investment when markets are driven more by positioning and leverage than by corporate performance. A negative outcome does not require a collapse in AI investment: slower profit growth, falling memory prices, or a reduction in leverage would be sufficient to trigger substantial declines.
This article does not constitute investment advice or a recommendation.
