The Wall Street Journal (WSJ) has issued a warning that Korea's stock market "could end like the drama 'Squid Game.'" The comparison suggests that after a spectacular surge, most retail investors could be left holding the losses.
Risk of Becoming Squid Game: Extreme Volatility
According to the WSJ's Markets A.M. newsletter on Monday, Korea's stock market has risen 165% over the past year, the highest return among the world's major economies.
The problem lies in how it got there. Referring to a KOSPI that has swung sharply day by day, the WSJ used the phrase "World's Hottest Market Risks Becoming a Squid Game."
In the first half of this year (January to June), the number of times the volatility interruption (VI) mechanism was triggered in the KOSPI market reached 29,357, a new record high on a half-year basis. The previous record was 24,401 in the first half of 2020, when the market plunged amid the COVID-19 shock.
The KOSPI index itself has swung to a historic degree. According to the Korea Exchange (KRX), the KOSPI's average intraday volatility in the first half of this year was 3.30%, the second highest on record after the first half of 1998 (3.51%). Intraday volatility is calculated by dividing the difference between the day's high and low by the average, so the more violent the intraday swings, the higher the figure.
Concentration in Leveraged Products
The WSJ analyzed that single-stock leveraged products have further magnified these swings.
Buying such products in Korea carries risks so significant that investors must pass a test, and authorities including the central bank have ultimately expressed concern and are seeking measures to curb speculation, the report explained.
Indeed, according to the Korea Exchange's investor-by-investor trading data on Tuesday, retail investors net purchased a staggering 1.6135 trillion won across 10 spot-type single-stock leveraged ETFs tied to Samsung Electronics and SK hynix over the four trading days from the 1st through the market close on the 6th. This figure excludes futures-type single-stock leveraged ETFs.
The WSJ likened this fervor to a "casino." The warning is that when the game ends, most of the losses could be borne by domestic retail investors. According to the WSJ, foreign net outflows from Korea's stock market in the first half of this year exceeded $100 billion (about 153 trillion won), reaching $30 billion (about 45.9 trillion won) in June alone.
Mechanical Selling, or a Warning Sign?
There are, of course, differing views on the foreign selling. According to CNBC on June 8, Chetan Seth, Asia-Pacific equity strategist at Nomura, viewed the selling not as a result of deteriorating fundamentals in the Korean economy, but as a temporary, mechanical adjustment following the sharp rise in Korea's weight within the index.
If this diagnosis holds, selling pressure was expected to ease this month as profit-taking declined. But the wave of selling has continued, and there are even concerns that selling pressure could intensify further in the second half.
Oh Jae-young, a researcher at KB Securities, said, "Excluding the 2009 Lehman crisis, the foreign ownership ratio in the KOSPI has historically ranged from 29% to 45%." He added, "If we assume the foreign ownership ratio, currently around 39.5%, falls to 35%, an additional roughly 260 trillion won in selling would be possible."
He added, "As the market rises, foreign investors' rebalancing needs also increase, so selling is likely to continue. The remaining potential volume available for sale is estimated to exceed the amount sold so far."
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