Foreign investors, long net sellers of South Korean equities this year, turned decisively buyer in a volatile end to the month - purchasing 7.2 trillion won ($5 billion) of local shares in a single day, more than twice the prior one-day record. The dramatic inflow capped a turbulent July that saw outsized moves in the KOSPI benchmark and left domestic retail investors nursing steep losses.
The market's gyrations were centered on the country's dominant memory chip companies, which some large investors view as retaining positive demand momentum despite the sell-off. Those firms were hit especially hard during the July plunge, driven in analysts' and market participants' accounts by leverage in derivative and ETF products rather than by a sudden deterioration in fundamentals.
Steve Lawrence, chief investment officer of U.S.-based Balfour Capital Group, characterized the episode as "a leverage event, not an earnings event." Lawrence, who manages more than 900 million, said he remains bullish on Samsung Electronics, arguing the shares were sold down because the company carried a disproportionately large weight in the index rather than because its business outlook had changed. "The memory cycle and the AI capex story are intact, and the unwind is handing it to you at a discount the fundamentals dont justify," he said.
Despite the upbeat assessments from some investors, the damage to many retail portfolios was severe. Individual traders were left exposed to roughly a 40% drawdown from the market peak in June into late July, a decline that prompted public frustration and political attention.
Leverage in exchange-traded funds emerged as a central factor amplifying market moves. Research from J.P. Morgan notes that assets in leveraged ETFs tied to Samsung Electronics and SK Hynix plunged from about $50 billion in late June to roughly $17 billion by last week. Those products - including newly introduced single-stock leveraged ETFs - are cited by market participants as having magnified both the rally into June's highs and the subsequent downside in July.
Analysts pointed to forced liquidations at a distressed hedge fund, Situational Awareness, as an accelerant to the sell-off. Citadel in turn purchased the bulk of that fund's remaining equity holdings, which appears to have taken some of the selling pressure out of the market.
Samsung's stock, for example, fell to about half its June peak at the trough in late July despite the company reporting a 250-fold increase in chip profit and offering a solid outlook supported by demand from data centers. Shares of SK Hynix experienced a similar pattern of dramatic decline followed by an abrupt rebound in a highly volatile trading session.
Data from EPFR showed that average allocations to South Korea among active global emerging market funds climbed sharply over an 18-month stretch before flattening in June as volatility spiked. J.P. Morgan analysts led by Rajiv Batra, head of Asia and co-head of global emerging markets equity strategy, have argued that the leveraged ETF unwind in Korea is largely complete and that hedge funds are about 90% through deleveraging, returning positions to "acceptable levels." In a July note they added that if a durable bottom forms, historical precedent of prior emerging-market corrections points to a median 12-month return near 28%.
Market structure concerns have drawn intense scrutiny from policymakers. Single-stock leveraged ETFs, which launched in South Korea in May, are widely cited as having turbocharged both the prior rally and the subsequent collapse. William Bratton, head of cash equity research for APAC at BNP Paribas, noted that "long-only investors just dont want to have to manage positions in stocks which are moving as violently as these stocks are moving." The ferocity of moves prompted a public apology from South Korea's Finance Minister Koo Yun-cheol for permitting these products without sufficient safeguards, and authorities have moved to impose measures aimed at curbing their impact.
Citi's trading strategies desk has estimated that retail investors suffered roughly $38.7 billion in losses in leveraged ETFs, a figure that has intensified criticism of the regulators who allowed single-stock leveraged funds to enter the market. "The amount of money that went into SK and Samsung was staggering," said Pierre Hoebrechts, deputy chief investment officer at East Eagle Asset Management. He cited the combination of a surge in new accounts, local leverage, concentrated exposure, and large 2x-levered foreign ETFs as elements that made the situation "an accident waiting to happen." Hoebrechts added that his firm had been positioned short on the KOSPI and Japan's Nikkei since late June but closed out those shorts last week, believing the washout phase may be approaching its end.
Short interest in South Korea, weighted by position value, has eased since its recent peak. Data from S3 Partners indicate average weighted short interest is about 4.3%, down from a high near 5.3% earlier in the drawdown.
Even as some signs of stabilization emerge, risks remain. The KOSPI swung widely, jumping 17.9% on the volatile Friday rally but then sliding nearly 5% the following Monday, underscoring the market's sensitivity to rapid flows and concentrated positioning. Such pronounced intra-week moves have left institutional investors weighing the trade-off between potential value and the difficulty of managing positions in an environment where prices can move violently.
"U.S. institutional investors, while wary of stepping into a falling market, may be willing to take another look at some of these (Korean) names now," said Larry Hatheway, head of research at Franklin Templeton Institute. That interest, together with the apparent reduction in leverage, helps explain the record foreign buying that closed out the volatile period.
Currency conversion used in coverage: $1 = 1,442.0900 won.