Wall Street has warned that Korea's stock market — which soared more than 160% over the past year to become the world's hottest — could turn into a "Squid Game" because of extreme volatility. Semiconductor concentration, foreign investor outflows, and retail investors' "debt-fueled investing" are combining to widen the market's swings, but no clear method to control them is in sight.
According to the Korea Exchange on Sunday, the KOSPI closed at 7,656.31, down 4.91% from the previous trading session. It plunged more than 8% intraday, triggering this year's sixth circuit breaker. Since 2000, the KOSPI market has seen circuit breakers triggered a total of 12 times, half of which — six — occurred this year. In particular, four have been triggered since May 27, when single-stock leverage products for Samsung Electronics (005930) and SK hynix were launched, reflecting extreme volatility. Asian markets were generally weak, but Korea's decline was especially large. Japan's Nikkei 225 and Taiwan's Taiex fell 2.12% and 2.31%, respectively, while the Shanghai Composite dropped 1.26%.
The Wall Street Journal (WSJ) pointed out that Korea's sharply surging stock market has been exposed to extreme volatility due to concentration in Samsung Electronics and SK hynix and a surge in leverage products. In fact, the market shock was amplified through leverage products. As Samsung Electronics and SK hynix fell 6.92% and 6.06%, respectively, 14 single-stock leverage products all plunged around 12% to 13%. The prices of these products fell to their lowest levels since listing, deepening investor losses.
In the market, some assess that Korea's stock market repeatedly wobbling even on small negative news reveals structural vulnerability beyond a simple price correction. The two top semiconductor stocks by market capitalization dominate the entire index, and as retail investors' margin loans and single-stock leverage funds fill the space left by departing foreign investors, even small shocks are spreading into sharp swings across the whole market.
The supply-demand structure is also precarious. Foreign investors have net-sold 41.0944 trillion won for 13 consecutive trading sessions and have sold off 161.5755 trillion won so far this year. As of Friday, foreign investors' holding ratio in Samsung Electronics fell to 46.69%, the lowest level in 17 years. Their holding ratio in SK hynix also stood at 50.17%, the lowest in three years and two months.
Warning signs have also emerged over retail investors' buying capacity, which has absorbed the shares dumped by foreign investors. Investor deposits, which stood at 139.6947 trillion won on the 4th of last month, recently fell to 112.2082 trillion won — a decline of 27.4865 trillion won in a month — dropping to the lowest level in three months. By contrast, the balance of margin loans, which shows retail investors' "debt-fueled investing," stood at 37.66 trillion won on Friday, not far from the all-time high of 38.6328 trillion won recorded on the 24th of last month. The WSJ warned, "In this situation, foreign investors are actually pulling out of this market," adding that "when the party winds down, the losses will most likely be left largely to local retail investors."
The problem is that it is difficult to find a clear solution to ease the market's overheating and volatility. An official in the financial investment industry who requested anonymity explained, "If you compare the net asset size of Samsung Electronics and SK hynix single-stock leverage products with similar products listed overseas, it is true that they are at the top," but "if the judgment that they are the main cause of expanded volatility is not clear, the need for strong measures could also differ."
Lee Hyo-seob, a senior research fellow at the Korea Capital Market Institute, said, "The expansion in volatility is the result of a combination of semiconductor concentration, macroeconomic uncertainty, and large-scale selling by foreign investors," adding, "The impact of single-stock leverage appears to be only about 10% of the total, so it is not easy to prepare measures targeting it."
With the market in a panic, experts still find it difficult to conclude that the KOSPI's fundamentals have been seriously damaged yet. Baek Young-chan, head of the research center at Sangsangin Securities, diagnosed, "The direct cause of the recent correction is foreign selling, but it reflects the effect of a growing desire to lock in profits following the sharp price surge rather than weak demand," adding, "There is no problem with Samsung Electronics' earnings or semiconductor demand itself." Shin Seung-jin, head of the investment information team at Samsung Securities, interpreted the foreign selling as portfolio rebalancing after a sharp rise rather than a collapse in industry conditions.
By contrast, there are also cautionary views that it is difficult to see it as merely profit-taking. Shin Joong-ho, head of the research center at LS Securities, analyzed, "Samsung Electronics posted earnings that were about as good as they could possibly get, yet the stock is falling," adding, "The market has begun to doubt whether the rise in memory prices and margin expansion is nearing a peak, and whether hyperscalers' capital investment can continue."
The market's eyes are turning to the earnings announcements of U.S. Big Tech companies late this month. The size of AI capital investment and forward guidance from hyperscalers' earnings must be confirmed before doubts surrounding semiconductor stocks can be resolved. If the continuity of investment is confirmed, a rebound is possible, but if a reduction in capital expenditure (CAPEX) materializes, the possibility of a stock price decline cannot be ruled out.
