On July 23rd, the Korea Composite Stock Price Index (KOSPI) rose again, surging 4.4% in a single day to break through the 7,000-point mark. The index has risen for three consecutive days, with a cumulative gain of 8.9%. However, it opened lower again today. After the recent sharp market volatility and deep index correction, the recovery path for South Korean stocks still seems full of uncertainty.
The current market focus is on whether this market adjustment, primarily driven by leveraged fund outflows, is nearing its end.
Leverage Recession
Since peaking in June, the KOSPI index has experienced a maximum drawdown of over 30%. The core triggers for this sharp decline include the liquidation of leveraged ETFs, a contraction in retail margin loans, and heightened market concerns over the sustainability of the memory chip industry's boom.
Regarding the deleveraging issue in the South Korean stock market, a recent report from JPMorgan suggests that approximately 75% of the liquidation work for leveraged ETFs, which recently caused KOSPI to plummet and amplified market volatility, has been completed.
According to data from the Korea Financial Investment Association, as of July 16th, South Korean investors had reduced their leveraged stock holdings to the lowest level in three months. Outstanding margin loan balances fell to 33.4 trillion won (approximately $22.8 billion), a 13% decline from the peak at the end of June.
Starting in June, South Korean regulators comprehensively tightened stock market leverage controls, shifting the regulatory tone from loose to strict. Measures included risk warnings, raising margin requirements for individual stocks, limiting single purchase amounts, and controlling leveraged ETFs. This, coupled with the Bank of Korea's 25 basis point rate hike on July 16th, further tightened the overall policy environment.
Data compiled by Caida Strategy shows that on July 22nd, the financing risk for individual investors in South Korean stocks decreased: the proportion of forced liquidation amounts to accounts receivable was 1.4%, down 4.3 percentage points from the previous trading day.
"With harmful leverage significantly reduced, the risk-reward ratio has become favorable," commented one market observer.
However, there is no consensus in the market on the progress of deleveraging. In another report, JPMorgan argues that while rising AI, memory, and semiconductor stocks over the past year were supported by earnings expectations, the core driver was the expansion of leveraged funds.
"Leveraged ETFs, call options, margin accounts, and long/short hedge funds collectively amplified the trend, providing additional buying power for Nvidia, memory chips, and South Korean semiconductor stocks during their upward phase. Currently, the size of leveraged ETFs across the market has shrunk 13% from its June peak, and the decline in memory chip-themed leveraged ETFs has reached 34%. However, there is still room for further deleveraging across various tools, and the entire process may take about three months to complete."
Foreign Capital Returns to the South Korean Market
In stark contrast to the passive deleveraging of retail investors, foreign institutional investors are re-engaging in South Korea's semiconductor sector.
On July 23rd, when KOSPI closed above the 7,000-point mark, foreign investors had been net buyers for four consecutive days. This week, net foreign capital inflows reached $3.8 billion, setting a new record for a single week. Notably, about 90% of the foreign buying was concentrated in the technology sector, and within the technology sector, 90% of the trading volume flowed into Samsung Electronics and SK Hynix.
A Goldman Sachs report from July 23rd also shows that hedge funds significantly increased their holdings in global semiconductor and semiconductor equipment sectors in the first half of the year, with positions hitting historical extremes in June. Starting in mid-June, hedge funds began to take profits en masse, cashing out about 80% of the net purchases accumulated this year. Analysts observed that in the past two days, hedge funds have started buying again and believe this demand will persist.
Capital Expenditure Continuity is the Core
Global tech giants' continuous increases in capital expenditure provide fundamental support for South Korean chip companies.
Alphabet raised its full-year capital expenditure target to $205 billion, and OpenAI is planning $750 billion in cloud investments. This sustained large-scale capital spending is expected to generate steady revenue growth for South Korean companies. The market is also watching to see if giants like Meta and Microsoft will follow suit with their own increases.
Giuni, a Goldman Sachs technology sector analyst, maintains an optimistic outlook on the memory chip cycle. The core logic is that the supply-demand dynamics for memory chips will remain tight, and long-term supply agreements can support memory product prices, keeping corporate profit margins high.
Caida Strategy points out that while the KOSPI index has risen 8.9 percentage points over the past three trading days and foreign capital is heavily absorbing sell orders from individual investors, the sustainability of this foreign buying spree depends on the capital expenditure commitments revealed in the second-quarter earnings reports of overseas cloud companies and the recovery of global risk appetite.
A seasoned South Korean stock investor noted that the ongoing cycle of rising capital expenditure in the global technology sector can provide fundamental support for Samsung Electronics and SK Hynix. Simultaneously, factors such as foreign holdings returning to reasonable levels, improved liquidity for brokerages, and the stabilization of retail margin risk indicators are compressing the downside for the market.
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