‘Samsung-Hynix Leverage’ Trade Turns Korea’s Stock Market Into a Casino, Threatening Lee’s Pledge

Reuters, Bloomberg criticize South Korean regulators’ response

"Money is crowding into leveraged products, undermining stable market flows"

"This is not a fundamental fix for volatility, and it is bad news for the ruling party"

Major foreign news outlets have criticized South Korean regulators after they rolled out follow-up measures to address sharp swings in the local stock market tied to single-stock leveraged products linked to Samsung Electronics and SK Hynix.

Reuters reported on July 19 that leveraged bets worth billions of dollars on South Korea’s AI companies had turned a stock market once seen as a reliable barometer of global economic growth into a casino that is baffling regulators and investors alike.

The volatility, felt across exchanges from Tokyo to New York, has not only inflicted heavy damage on investor portfolios but also sharply distorted investor views of the fundamentals of the South Korean market at the center of the global AI boom, Reuters reported.

"South Korea had long offered investors a durable level of trust that helped them identify when to buy and sell," Alexander Redman, a senior researcher at CLSA, said. "That relationship has now broken down, and the main force moving prices is the surge in inflows driven by single-stock leveraged funds."

Reuters said Samsung Electronics and SK Hynix were confusing investors as their shares fell regardless of fundamentals.

Their price-to-earnings ratios have dropped below 5, failing to reflect the full scale of future earnings and no longer responding to correlations with economic indicators that are usually considered reliable, Reuters said. Forced liquidations among South Korean retail investors added to the weakness.

The report also said rebalancing-related inflows had become large enough to move the market, with the net asset value of a leveraged product tied to SK Hynix and listed in Hong Kong swelling 20-fold from the start of the year.

"Some single-stock leveraged ETFs are equal to four times the average trading volume of the underlying stock," Florian Nato, chief investment officer for Asia at Amundi, said. "The rapid growth in assets under management shows there are limits to applying leverage to a single stock, and we can read that as a warning sign."

Bloomberg also identified rapidly growing single-stock leveraged products as a driver of volatility in the South Korean equity market.

The news agency said the shares of the two technology companies, which account for half of the benchmark Kospi index, have seen extreme swings in recent weeks. SK Hynix and Samsung Electronics have fallen 40% and 34%, respectively, from last month’s peaks.

It added that while financial authorities have announced several steps to address the abrupt volatility, the measures do not fully resolve the root cause, calling them a belated response.

Bloomberg said volatility could flare again if retail investors regain confidence and pile back in, or if they grow more anxious. That would be bad news for President Lee Jae-myung’s ruling party, which has pledged to support ordinary Koreans by fostering the domestic stock market.

Noh Jung-dong, Hankyung.com reporter dong2@hankyung.com