Retail Investors Lose $38.7 Billion as Bloomberg Says Worst of Korea Stock Turmoil May Be Over

Bloomberg Says South Korean Stocks May Be Emerging From Their Most Violent Phase

Bloomberg reported on August 9 that extreme volatility in South Korea’s stock market may be nearing an end as leveraged positions are unwound and regulators tighten trading rules.

In a report titled “Korean Stock Volatility Eases After Leverage Washout,” Bloomberg said the market’s most chaotic stretch may have passed after a historic selloff triggered widespread liquidation of leveraged bets and tighter rules sharply reduced trading in some high-risk products.

The Kospi climbed to a record high this year and broke above the symbolic 9,000 level in June before plunging into a sharp correction. In July, circuit breakers and sidecar curbs designed to prevent market disruption were triggered almost daily on the benchmark market as the index fell 22.19%. That was the steepest drop among major global equity markets.

The VKOSPI, the Kospi 200 volatility index often referred to as South Korea’s fear gauge, surged to an intraday record 97.99 on June 29. That exceeded its previous peak of 89.3 set during the 2008 financial crisis. The index was still hovering above 90 at the end of July, but has dropped to the mid-70s this month. Bloomberg said the decline reflected a reduction in margin balances after forced selling, as well as tighter curbs on single-stock leveraged exchange-traded funds tied to Samsung Electronics Co. and SK Hynix Inc. that cut trading volume and assets in those products. The move suggests that some of the leverage-driven overheating that amplified the market’s violent swings has eased.

A cash-deposit requirement of 30 million won ($21,700) for single-stock leveraged ETFs tied to Samsung Electronics and SK Hynix took effect on July 31. Separately, Citi Global Markets estimated in a July 28 market report for institutional investors that South Korean retail investors had lost $38.7 billion on leveraged ETF investments, according to the financial investment industry. The market capitalization of leveraged ETFs linked to Korean assets surged to about $52.5 billion on June 22 before collapsing to $19 billion a month later, the report said. Based on that, Citi estimated that 65% of credit-backed positions in the Korean stock market had been unwound since the start of the year and that retail losses on leveraged ETFs had reached $38.7 billion.

Bloomberg also said the Kospi’s 12-month forward price-to-earnings ratio had fallen to 5.1 after the correction, close to a record low. That suggests Korean equities look undervalued by some measures after the recent selloff.

Still, Bloomberg said global asset managers have yet to return to the Korean market in force because volatility remains elevated.

“Even after volatility has come down, it is still high, so investors are weighing historically cheap valuations and solid earnings prospects against the risk of further sharp swings,” Bloomberg said.

Yiping Liao, a portfolio manager at Templeton Global Investments, said Samsung Electronics and SK Hynix are clearly cheap and their earnings outlook remains solid. But the extreme volatility seen so far is making investors cautious in the short term.

The Kospi closed at 6,258.77 on August 7, down 37.61 points, or 0.60%. The index fell 5.10% in the first week of August.

Oh Jung-min, Hankyung.com reporter blooming@hankyung.com