After experiencing a sharp correction in July, the Korean stock market saw a notable rebound, but retail investor sentiment has not recovered. Several investors attribute this volatility to government-led stock market reforms, the relaxation of leverage limits on single-stock ETFs, and excessive speculation in AI-related stocks.
July's decline was the largest since the financial crisis.
The Kospi index fell 22% for the month of July, marking its largest single-month decline since the global financial crisis. Despite a 18% rebound last Friday, South Korean retail investors still recorded a record net sell-off, indicating that market confidence has not recovered.
That month, the KOSPI stock market triggered circuit breakers and halted trading four times—a frequency uncommon in the Korean market—which further heightened investor concerns about the high-volatility environment.
Retail investors entered the market in large numbers over the past two months.
In May and June, driven by President Lee Jae-myung’s push for stock market reforms and the launch of new products, South Korean retail investors collectively purchased approximately 78 trillion KRW in stocks, equivalent to about $54.2 billion. The market briefly experienced a notable "Kospi mania."
Among them, the single-stock leveraged ETFs launched at the end of May were initially seen as a move to expand retail investment tools and reduce capital outflows to similar overseas products. However, after significant volatility in July, these products became a focal point of criticism.
Some investors believe that leverage tools amplify market fluctuations, further concentrating retail trading on highly volatile stocks and making the market resemble a "casino" more closely.
Too high a concentration in AI-related stocks
The Korean stock market previously rose, partly driven by the AI boom. Samsung Electronics and SK Hynix, the two leading memory chip manufacturers, together account for more than half of the KOSPI's weight, making the index highly sensitive to movements in the semiconductor sector.
Analysts note that South Korean retail investors, driven by fear of missing out, have concentrated their bets on leading AI-related stocks and increased their positions using margin. When highly crowded trades are combined with leverage, market pullbacks often lead to prolonged deleveraging, meaning technology and semiconductor stocks may continue to experience significant volatility in the near term.
Regulators have begun tightening product regulations.
In response to market volatility, South Korean regulators suspended the listing of new single-stock leveraged ETFs in mid-July and last week pledged to introduce additional measures to stabilize the market while restricting retail investors' access to such products.
However, many investors and market participants believe the measures were introduced too late. Although the AI narrative supporting the Korean stock market has not disappeared, the sharp decline in July has prompted many retail investors to reassess their risk tolerance, and the recovery of market confidence may lag behind the index's rebound.