South Korea’s benchmark equity index plunged further on Wednesday, extending a dramatic selloff that has erased more than 40% from the market since a peak recorded a little more than a month ago. The KOSPI slid as much as 12.6% intraday following an almost 11% decline on Tuesday, leaving the market on track for a record two-day fall.
Trading volumes were light, a signal market participants said was consistent with buyers withdrawing from what only weeks ago was a top-performing trade: owning chipmakers expected to benefit from surging artificial intelligence spending. Much of that earlier buying was driven by small investors who increased exposure using borrowed funds. That same leverage is now intensifying losses as brokers move to close out losing positions.
"It’s certainly a very crowded trade which is being unwound," said Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong. "If you look at what is falling in the market, it has been the stocks in which you have the most leverage."
Two of the largest listed companies on the KOSPI, SK Hynix and Samsung Electronics, led the declines. SK Hynix, which reported a six-fold earnings jump in the morning, saw its shares fall about 16% by mid-afternoon. Samsung Electronics dropped 9.8%.
Together the two chipmakers account for more than half of the market capitalisation of the KOSPI and have exerted an outsized influence on index performance this year as traders sought exposure to the lucrative AI-driven memory market amid a shortage of advanced memory chips.
Market technicians and strategists said hopes for a rebound after Tuesday’s near-10% fall evaporated, triggering panic selling that forced many investors to crystallise losses. "Hopes of the market rebounding today after a 10% plunge yesterday faded, triggering panic selling and forcing most stock investors to book losses," said Han Ji-young, an analyst at Kiwoom Securities. "Doubts are prevalent in the market that the current index level would not be the bottom."
Elsewhere in the region, Taiwan Semiconductor Manufacturing Co, the world’s largest contract chipmaker, fell about 3% in Taipei.
South Korean Finance Minister Koo Yun-cheol told lawmakers at the National Assembly that the government is reviewing measures to stabilise markets, including possible adjustments to regulations governing single-stock leveraged exchange-traded funds. Some analysts have argued that such leveraged products can amplify market volatility.
Despite the recent steep decline of more than 40% from its high last month, the KOSPI remains one of the strongest major markets year-to-date when measured in U.S. dollars, rising 41.5% so far this year.
"Today’s price action suggests that the leverage within Korean equities remains high and a further unwind could be expected," said Wee Khoon Chong, Asia-Pacific macro strategist at BNY in Hong Kong.
For reference, the article noted the exchange rate of $1 = 1,451.9000 won.
Summary
The KOSPI experienced a historic two-day decline as heavy losses in dominant memory chip stocks forced leveraged retail positions to be closed out. Light trading volumes and the concentration of market capitalisation in SK Hynix and Samsung Electronics intensified the downturn. Authorities are considering market-stabilisation steps, including reviewing rules on single-stock leveraged ETFs.
Key points
- KOSPI plunged as much as 12.6% on Wednesday after nearly an 11% drop on Tuesday, tracking for a record two-day fall and a decline of more than 40% from a recent peak.
- SK Hynix shares fell about 16% by mid-afternoon despite reporting a six-fold earnings increase; Samsung Electronics dropped 9.8% - the two account for over half of the KOSPI market capitalisation.
- Light trading volumes and high leverage among small investors accelerated the selloff as brokers closed losing positions; policy makers are reviewing potential stabilisation measures including adjustments to single-stock leveraged ETF regulations.
Risks and uncertainties
- The potential for a continued unwind of leveraged positions in Korean equities could lead to further pressure on chip and technology sector stocks, increasing volatility across the market.
- If authorities alter regulations for single-stock leveraged ETFs, there could be short-term dislocation in liquidity or investor flows in the affected products and the underlying stocks.
- Market sentiment remains uncertain, with prominent analysts expressing doubts that current levels represent the bottom, which raises the risk of additional forced selling and losses for retail investors.