After a sharp deleveraging process, the excessive speculative fervor in the South Korean stock market has been largely absorbed, placing the market at a new observation point. The KOSPI index, having stabilized and rebounded near its 200-day moving average, has entered a consolidation phase, with implied volatility falling rapidly, the scale of leveraged ETFs contracting notably, and margin balances declining, all indicating that the accumulated leverage risks are accelerating their release. Meanwhile, the KOSDAQ has continued its rebound, but the performance of Samsung Electronics and SK Hynix remains relatively weak, weighing on the KOSPI.
On the valuation front, the KOSPI's 12-month forward price-to-earnings ratio has compressed significantly. Analysts point out that with the clearing of leveraged funds and the stabilization of market volatility, if Samsung Electronics and SK Hynix rejoin the rally, the Korean stock market may still have significant room for a catch-up move.
Deleveraging Complete, Volatility Drops Significantly
The root of this correction in the Korean stock market lies in the speculative frenzy driven by ETF leverage and extreme options activity. According to LSEG Workspace data, the KOSPI had previously shown a rare phenomenon of "spot prices rising simultaneously with volatility," with the market's implied average daily fluctuation range once reaching approximately 6%. As the sell-off wave emerged, the KOSPI VIX underwent a major reset, with the current implied average daily fluctuation range falling back to about 3.8%. The asset management scale of leveraged ETFs has shrunk sharply, margin balances have decreased, and margin call pressure is gradually normalizing.
From a technical perspective, after halting its decline near the 200-day moving average, the KOSPI displayed a large bullish candle but has since become stuck in a stalemate, sandwiched between the long-term trend line and a short-term downtrend from its all-time high. The 21-day moving average sits slightly above the current price level, and a breakout could see options-related capital flows amplify volatility once again.
SK Hynix and Samsung Are Key Variables
SK Hynix, a core target of the Korean AI rally, was once dubbed the "world's largest leveraged ETF" by the market. According to data from Societe Generale, the asset management scale of leveraged ETFs for SK Hynix and Samsung Electronics has shrunk substantially, with the degree of deleveraging being quite significant. After a strong rebound from its recent panic low, the SK Hynix stock price gave back most of its gains and is now retreating back to near its long-term trend line. JPMorgan believes that the most difficult period for SK Hynix may have passed. The bank is skeptical of reports suggesting a 50% discount on HBM pricing and characterizes the massive 54 trillion won infrastructure investment plan as a strategic move to meet long-term AI demand, rather than a signal of near-term overcapacity.
JPMorgan maintains an Overweight rating on SK Hynix with a target price of 2.75 million won, noting that catalysts such as the shareholder return plan, HBM pricing dynamics, and the potential progress of Solidigm's IPO are expected to materialize by the end of September. Samsung Electronics is also near a key support level, and a successful recovery of that level could trigger a new round of short-squeeze activity.
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