South Korea's stock market is undergoing its most severe test this year, with the benchmark KOSPI index's decline from its record high briefly touching 20%, bringing it close to the technical bear market threshold. Concurrently, regulators have convened an emergency meeting, warning that excessive concentration in the semiconductor sector has become a core risk amplifying market volatility.
According to reports, South Korea's Finance Minister, Choo Kyung-ho, called a meeting on Wednesday with the central bank governor and heads of major financial regulatory bodies. A statement issued after the meeting noted that profit-taking and portfolio rebalancing by foreign and institutional investors, coupled with shifting expectations for the global AI sector, have collectively heightened market volatility. The statement directly addressed the concentration issue in the semiconductor sector, stating that "the rising concentration in the semiconductor sector has become a driver of market volatility, and the impact of chip stock fluctuations on the overall stock market is intensifying."
The KOSPI plunged as much as 5.7% during Wednesday's session, hitting its lowest level since May 20, before recovering some losses driven by a rebound in chip stocks; it remains down approximately 15.6% from its all-time high set on June 22. SK Hynix Inc saw an intraday decline of up to 5%, while Samsung Electronics Co Ltd fell as much as 6.9%. Notably, Samsung Electronics had earlier this week reported a quarterly profit surge of 19 times year-over-year, yet its stock price remained under pressure, indicating that market doubts about the sustainability of AI investments are currently outweighing positive fundamental news.
A Shift from Market Leader to Bear Market Brink
Earlier this year, the South Korean stock market was among the world's top performers. The KOSPI had rallied approximately 116% from the start of the year to its record high on June 22. Its year-to-date gain, while now around 73%, still places it near the top among major global benchmark indices.
However, this rally was heavily reliant on the two chip giants, Samsung Electronics and SK Hynix, making the market particularly vulnerable when sentiment towards AI reversed. Over recent weeks, the KOSPI has experienced sharp swings as investors parse every development in the AI industry, with the market attempting to assess whether the rally can be sustained.
"A lot of the volatility is coming from the uncertainty around the fundamentals," an investment portfolio manager stated. "We are seeing strong demand for various semiconductors driven by AI, but this largely depends on the roughly $1 trillion in capital expenditure from a handful of large tech companies." Should this scale of chip spending prove unsustainable, downside risks would materialize.
Leveraged ETFs Amplifying Volatility
Regulatory concerns extend beyond the semiconductor sector itself to the rapidly expanding market for single-stock leveraged ETF products.
South Korea's Financial Supervisory Service stated on Tuesday that it would monitor the impact of single-stock leveraged ETFs linked to chip stocks on the market and review asset managers' marketing practices if necessary. The Bank of Korea had issued a warning on Sunday, stating that single-stock leveraged ETFs could amplify one-sided trading, increase concentration in specific stocks, and exacerbate market volatility, adding that it would coordinate with relevant agencies to address associated risks.
Reports indicate that leveraged ETFs amplify price moves in both directions and have been a significant contributor to the KOSPI's recent severe volatility.
Frequent Circuit Breaker Triggers and Escalating Regulatory Scrutiny
The intensity of market volatility has left its mark on market mechanisms. Earlier this week, the KOSPI triggered its circuit breaker mechanism again, marking the sixth such occurrence this year and the twelfth in the history of the South Korean stock market. The trigger was the sharp volatility in heavyweight chip stocks like Samsung Electronics and SK Hynix.
In response to the escalating market risks, South Korean regulators are intensifying their response. From the central bank's risk coordination statement and the financial watchdog's pledge to monitor ETFs to the cross-departmental meeting chaired by the finance minister, a series of concentrated statements indicate that authorities view this wave of volatility as a financial stability issue requiring a systemic response, rather than merely a normal market adjustment.
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