Key facts
- South Korea's KOSPI index has seen a boom driven by AI enthusiasm, particularly in memory-chip stocks.
- The KOSPI index experienced a significant drop of 6.4% on Thursday, with SK Hynix and Samsung Electronics leading the decline.
- Aggressive retail investor buying, often with borrowed funds and leveraged ETFs, is identified as a major market risk.
- Leveraged ETFs linked to Samsung Electronics and SK Hynix have rapidly grown to an estimated $12 billion in a month.
- Annualized volatility in Korean equities has increased to approximately 80% since May.
- South Korea's financial regulator announced new measures, including banning promotional events for single-stock leveraged ETFs.
South Korea's stock market has experienced a significant surge this year, fueled by enthusiasm for artificial intelligence and driven by memory-chip giants SK Hynix and Samsung Electronics. However, this rally has been accompanied by increased volatility, with the benchmark KOSPI index experiencing sharp pullbacks. HSBC strategists have identified aggressive buying by retail investors, often using borrowed funds and leveraged exchange-traded funds (ETFs), as a primary risk factor. These leveraged products, which aim to multiply daily returns, have seen rapid growth, with assets in those tracking SK Hynix and Samsung Electronics ballooning. The daily rebalancing required by these ETFs can exacerbate price movements in either direction, amplifying gains and losses. This has contributed to a significant rise in annualized volatility for Korean equities. In response to the growing concerns, South Korea's top financial regulator has announced new measures, including banning promotional events for single-stock leveraged ETFs and advising against new launches, acknowledging that previous approvals were made hastily.