After a historic sell-off cleared leveraged positions and regulatory tightening sharply reduced the trading volume of certain high-risk products, the most turbulent phase of South Korea's stock market may have come to an end.
The Korea Volatility Index, which hit a record high in June, fell to a two-month low last week. Margin calls reduced market borrowing balances, and new regulations on leveraged ETFs took effect, causing the trading volume and asset size of products linked to chip giants Samsung Electronics and SK Hynix to shrink, thereby stabilizing the market.
These changes suggest that some of the leveraged trading bubbles that previously amplified the stock market's sharp swings have been cleared. Morgan Stanley estimates that the deleveraging process is more than halfway complete. The KOSPI index has fallen nearly 40% from its June peak. Global funds have sold over $100 billion worth of South Korean stocks year-to-date, and emerging market funds remain underweight on the country's equities.
However, foreign asset managers have not rushed to return. Although volatility has declined, it remains elevated. Investors must weigh historically low valuations and improving earnings prospects against the risk of another major market swing.
Isaac Tong, Senior Investment Director and Portfolio Manager at Aberdeen Standard Investments' Asia Income Fund in Singapore, said: "We are leaning bullish but not fully comfortable yet, as volatility is still high. Only when potential expected returns are high enough to match the current volatility risk will the market see a genuine improvement. We are waiting for that moment."
Driven by the stock market's dramatic swings, the Korea Volatility Index surged to a record high of 96.9 in June, up from just 28.9 at the end of 2025. Last month, the circuit breaker mechanism, which halts trading for 20 minutes when the index falls 8%, was triggered four times, and the KOSPI moved more than 5% on nearly half of the trading days. On July 31, the market surged 18% in a single day, a record for the largest daily gain.
Regulators introduced several measures in response to the market's extreme volatility and pledged to launch more tools to curb demand for leveraged products. On July 31, South Korea raised the cash margin requirement for single-stock leveraged ETFs, leading to a decline in the trading volume and asset size of funds linked to Samsung Electronics and SK Hynix.
The combination of the market crash and tighter regulations has washed out a large number of retail investors who had been drawn in by the rally. Data from the Korea Financial Investment Association shows that the scale of forced liquidation of retail investor accounts was approximately 1 trillion won ($710 million) in June and 993 billion won in July, the two highest months of the year. As of August 4, the balance of funds used for stock trading dropped to 27.4 trillion won, the lowest level this year.
Maxence Vaysse, Chief Investment Officer at Arkevium Capital in Dubai, said: "The market is transitioning from being retail-driven to being dominated by foreign institutions. But a few days of stability are not enough. Overseas investment institutions need to see concrete evidence that the price discovery mechanism is functioning normally."
After a round of selling, some valuation metrics for South Korean stocks have fallen to low levels. The KOSPI's 12-month forward price-to-earnings ratio has dropped to a record low of 5.1 times, yet it has still failed to attract a massive return of asset managers.
Earlier this year, the South Korean stock market rallied significantly, driven by the AI chip boom. However, extremely high volatility and the market's heavy reliance on two major chip companies created a bubble that was easily burst.
Liao Yiping, a fund manager at Templeton Global Investments in Singapore, said: "The current valuations of Samsung Electronics and SK Hynix are indeed very low, and their earnings outlook remains positive. But the persistently high market volatility is making short-term investors more cautious."
"Given such dramatic market swings, capital will not flow back in massive and rapid waves; it will only trickle in with small, gradual batches."
Exchange data shows that the pace of global fund outflows from South Korean stocks has slowed, but the selling has not stopped. After a record net sell-off of $30 billion in June, foreign investors net sold $6.2 billion in July and $4.3 billion so far in August.
Despite this, some market participants remain bullish.
Goldman Sachs reiterated this week its 12-month target for the KOSPI at 12,000 points, implying a potential upside of about 90% from last Friday's closing level.
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