SerpApi.Org
South Korea’s biggest market strength is starting to look like its biggest vulnerability.
On-again-off-again appetite for artificial-intelligence trades is fueling volatility in the country’s benchmark Kospi index, with swings driven by the stocks of two chip makers central to the global AI build-out.
Together, Samsung Electronics and SK Hynix account for over half of the index, tying the broader market’s fortunes to the two semiconductor giants.
Korean authorities are working to restore order, with President Lee Jae Myung telling regulators to implement measures to curb speculative trading, “quickly and aggressively.” But analysts say it will be difficult to keep AI-driven volatility in check.
The countermeasures, including tighter rules on single-stock leveraged exchange-traded funds, should help moderate some of the most excessive speculative activity. However, financial markets are by nature adaptive, and investors can adjust to the higher cost of short-term trading, said Marcus Weyerer, director of ETF investment strategy at Franklin Templeton.
For KB Financial Group’s Peter S. Kim, regulatory moves are unlikely to do much to dislodge Korea’s entrenched culture of fast-money investing. Since the launch of single-stock leveraged ETFs on May 27, Korean individual investors have poured about $9.45 billion into the products, often tracking chip makers. Foreign investors’ net purchases stand at $1.35 billion, Kim wrote in a note.
Citi estimates that Korean households invested about $70 billion in equities and ETFs in the second quarter. The bank calculates that households are sitting on $68 billion to $167 billion of potential equity investment capacity through the first quarter of next year.
These market flows underscore the growing role of Korea’s domestic retail traders, which can be erratic. Institutional foreign investors have become net sellers of equities.
While regulators saw the launch of the ETFs as a chance to broaden market participation, the retail surge into leveraged funds has raised the risk of cascading margin calls, complicating efforts to build a long-term investing culture.
“The emergence of ETFs as mainstream investment vehicles is both an opportunity and threat for the Korean equity market, as it shifts individual investors away from small-caps and the Kosdaq market,” KB Financial’s Kim said.
Ultimately, the strength in tech and AI that has sent the Kospi to record highs could be an Achilles’ heel.
With few compelling long-term growth stories outside of tech foreign and domestic investors with different investment horizons and risk appetites are piling into in the same small group of stocks, said William Bratton, APAC head of cash equity research at BNP Paribas. That is likely to continue, meaning that shifts in investor positioning will keep conditions volatile.
“[The market’s lack of breadth] may prove to be an ongoing deterrent for the longer-term capital that the country is seeking to attract,” he said.
Despite the roller-coaster ride, the Kospi remains one of the world’s top-performing equities market. The index is up about 61% so far this year, driven in large part by Samsung and SK Hynix which have risen 117% and 181%, respectively.
How the gains hold up if AI-centered turbulence continues unchecked remains to be seen.
At least for KB Financial’s Kim, the push to cultivate a long-term investment culture is unlikely to be able to keep pace with the rapid developments of an AI-driven market.
Write to Jason Chau at [email protected]