Regulatory crackdowns by South Korean authorities on leveraged exchange-traded funds (ETFs) linked to semiconductor giants have yielded swift results, with a notable contraction in trading volumes for related derivatives.
On Monday, trading volume for the nation's largest single-stock ETF, which tracks SK Hynix, plunged to 59 million shares, marking its lowest level since June 4th this year. Simultaneously, trading in a similar product tied to Samsung Electronics fell to a trough not seen since its listing at the end of May.
This sharp decline in trading activity directly stems from cooling measures implemented by South Korean authorities effective July 31st. Regulators tripled the minimum cash deposit requirement for leveraged ETF transactions from 10 million won to 30 million won (approximately $21,065), and previously suspended new listings of single-stock leveraged ETFs until market conditions stabilize.
With the higher capital threshold, the fervor among South Korean retail investors for margin trading has subsided. Data from the Korea Financial Investment Association shows that as of July 31st, the balance of margin loans used to finance stock purchases had shrunk further to 28.9 trillion won, hitting its lowest level since January of this year.
"The speculative leverage bubble in large-cap tech stocks has been neutralized in both upward and downward directions," commented Peter Park, an equity sales assistant at NH Investment & Securities. He emphasized that because retail investors are not subject to selling restrictions but face high cash barriers for new positions, "the speculative retail leverage turnover has effectively ended."
The speculative frenzy in South Korea's stock market, totaling $3.7 trillion, was initially ignited by the global artificial intelligence (AI) trading hotspot. As a bellwether for the AI industry, the Korea Composite Stock Price Index (KOSPI) has gained about 48% year-to-date, but leveraged funds using derivatives to amplify returns have made it one of the world's most volatile markets. Extreme volatility forced South Korea's stock market to trigger trading circuit breakers four times in July, an unprecedented event. Currently, the KOSPI volatility index remains above 80, lower than the peak of 97 in late June, but still signals continued sharp intraday swings in the short term.
Despite the constraints on retail speculation and the market's recent heavy losses, Goldman Sachs remains bullish on South Korean assets. Timothy Moe, the firm's chief Asia-Pacific equity strategist, reaffirmed his positive outlook on the South Korean stock market, maintaining a target price of 12,000 points for the KOSPI. Moe noted that once volatility recedes, the highly attractive fundamentals will reassert their dominance over market direction. He added that the current market price-to-earnings ratio in South Korea is only 5 times, indicating a state of significant undervaluation.
Addressing concerns about the sustainability of the semiconductor memory cycle, Goldman Sachs offered a contrasting prediction. "We believe the current semiconductor cycle is larger and longer than usual," Moe stated clearly.
While supporting South Korean assets, Moe issued a warning about the Japanese market, which has recently engaged in foreign exchange intervention. Analyzing Japan's macroeconomic environment, he cautioned that the Japanese stock market faces tactical correction risks, and from a fundamental perspective, the yen's appreciation potential is very limited.
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