KOSPI Overheating Signals Call for Vigilance on Volatility

Signs of overheating are clearly visible across the KOSPI market. As the likelihood of a U.S. rate hike rose and the semiconductor stock rally hit an abrupt brake, the 8,000 level collapsed after just nine trading sessions. The won-dollar exchange rate also jumped to 1,550 won, heightening market anxiety. Bloomberg warned that "caution is spreading among global investors over the KOSPI, which has recorded one of the world's highest gains this year."

The market's sharp volatility and concentration are also causes for concern. On Wednesday, the KOSPI fell below 7,500 shortly after the open, triggering a circuit breaker and a temporary suspension of program sell orders (sell-side sidecar) in succession. A circuit breaker is a mechanism that halts trading for 20 minutes when the index falls 8 percent or more from the previous trading day, meaning market volatility had expanded to a point requiring forced control. In fact, KODEX Samsung Electronics Leverage, last week's top trading volume product, surged 47.2 percent over three trading sessions from the 29th of last month through the 2nd of this month, then plunged 54.5 percent over three trading sessions from the 4th through the 8th. Market concentration is also a major problem. While some KOSPI stocks such as semiconductors and artificial intelligence (AI) recovered their losses, the KOSDAQ index slid to around 910, retreating to its level of a year ago.

Even as warning sirens over market overheating and concentration grow louder, "leveraged investing" is rising again. The balance of margin loans is approaching 38 trillion won, and customer arrears—ultra-short-term leveraged bets—are nearing the 2 trillion won range. The practice of borrowing money to invest even in leveraged exchange-traded funds (ETFs) is closer to speculation than investment. Polarization by industry also fuels concentration. If structural reform of sectors losing competitiveness, such as steel and petrochemicals, is delayed, industrial polarization will deepen, and this can only act as a potential risk factor for the stock market.

Another destabilizing factor amplifying stock market volatility is the foreign exchange market. If the rising exchange rate continues in tandem with foreign selling, foreign exchange authorities must respond more aggressively. If exchange rate instability is prolonged, there is a strong concern that rising prices and the burden of imported raw material costs will damage corporate profitability and act as a negative factor for the stock market. It is time for financial authorities to drastically strengthen monitoring of market overheating and the management and supervision of leveraged investment, and to enhance the market's resilience and stability by improving the market's fundamentals and expanding its supply-and-demand base.