Kospi Volatility Cools, but Thin Trading Stalls Push Above 7,000

After wild swings last month, South Korea’s Kospi has entered a calmer phase following tighter rules on single-stock leveraged products. Volatility has dropped quickly, but trading volume and value have also fallen, weakening the market support needed to sustain a move above 7,000.

Data from the Korea Exchange showed sidecars were triggered five times on the benchmark stock market from the start of August through Aug. 28. That was about one-third of the 15 cases recorded in July. It also marked a sharp easing from the combined 25 triggers in June and July, when sidecars were activated 10 times and 15 times, respectively. Circuit breakers, which were triggered four times in July, were not activated at all in August.

The index’s daily swings have narrowed as well. In July, the Kospi moved more than 3% on 14 of 22 trading days, or 64%. In August, that fell to eight of 19 sessions, or 42%. The number of days with moves of more than 5% also dropped to three from 10 over the same period.

The VKOSPI, the Kospi 200 volatility gauge, has also stabilized quickly. It stood at 50.08 on Aug. 28. The index had surged to as high as 97.99 intraday in late June and was still at 86.18 on July 30, before falling more than 40% over the next 20 trading days. It returned to the 50 level on a closing basis for the first time in about four months. That followed tighter regulations on high-risk single-stock leveraged products tied to large-cap names such as Samsung Electronics and SK Hynix. Financial authorities raised the minimum deposit requirement for those products to 30 million won from 10 million won.

The problem is that lower volatility has been accompanied by weaker trading activity. Average daily Kospi trading volume in August fell to 321.79 million shares, while average daily trading value dropped to 25.7568 trillion won, both the lowest this year. Average daily turnover, a measure of how frequently listed shares change hands, also slipped to 0.54%. That compared with 0.82% in June and 0.72% in July, underscoring a clear pullback in investor participation.

The Kospi climbed to as high as 9,385 intraday in June, then tumbled to 5,262 at the end of July before rebounding. Even so, it has yet to establish a clear break above 7,000. The index rose to 7,216 intraday on Aug. 18, but failed to extend the rally and has since traded in the upper 6,000 range. Retail investors hit by the selloff remain saddled with losses, while fresh inflows have also slowed.

Brokerages say the Kospi will struggle to quickly reclaim its previous high unless a new group of buyers emerges to replace funds that exited single-stock leveraged products. With trading shrinking and the market’s demand base weakening, the index may go through a period of consolidation before attempting a gradual rebound.

Expectations that corporate earnings growth could slow next year are also weighing on sentiment. If hopes for earnings improvement weaken as well, the Kospi could remain boxed in around 7,000 for an extended period.