Explained: Why Kospi skyrocketed 18% today after massive selloff and what’s ahead for South Korea’s 'bipolar' stock market

South Korea’s stock market skyrocketed a whopping 18% on Friday, nearly wiping off all losses recorded in a three-session losing streak as strong earnings from Wall Street majors brought in a fresh wave of optimism around tech-focused stocks, which in turn sparked the massive rally in South Korea’s seesaw market, which an analyst quipped to be 'bipolar'.

Ironically, US tech firms released better-than-expected quarterly results, but the shares of Korean tech giants Samsung and SK Hynix rallied sharper, skyrocketing up to 28%. On Wall Street, Microsoft shares rallied 16%, adding a record $450 billion to its market cap in just one session.

The Kospi had skyrocketed over 122% since the beginning of the year to hit a lifetime high of 9,386 in June amid a global AI frenzy, before things began to go downhill. While South Korea’s stock market grabbed headlines as the world’s best performing stock market this year so far, analysts were quick to point out the concentration of chipmakers Samsung Electronics and SK Hynix, which make up just over half of the benchmark Kospi.


The final nail in the coffin was likely to be the single-stock leveraged ETFs linked to these two chipmakers, which seemed to further increase concentration risks, leading to the Kospi spiralling down 40% until yesterday.

This led to the government scrambling for measures to save retail investors, who began to protest. The sidewalk outside the National Assembly building in Seoul was covered with nearly 40 wreaths of condolence flowers laid in protest against the government's handling of the single-stock leveraged funds. One ribbon on a white wreath read "Slaughtering retail investors". "Wait 'til payback time, I will repay next time I vote," read another.

Also read | 'Wait till payback time!': South Korean retail investors protest as govt apologises after Kospi crashes 40% in a month

During a parliamentary session, South Korea’s Finance Minister Koo Yun-cheol apologised for the introduction of single-stock leveraged ETFs, saying they had not been considered carefully enough. He added that the government is reviewing market stabilisation measures, including adjusting regulation related to the funds, which some analysts have blamed for increasing the amount of leveraged trading on the Seoul bourse.

Today’s sharp rally has recovered some of the losses, but the Kospi continues to remain 29% below its June peak. Investors still remain in panic mode as any such sharp upswing seen in the Korean market has inevitably led to an equally sharp downturn recently.

"The Korean stock market has been trading as if it has bipolar disorder, swinging from panic to euphoria almost overnight," CNBC quoted Jung In Yun of Fibonacci Asset Management as saying. He added that today's move looks like a violent reversal of an extremely crowded selloff.

What lies ahead?

Nomura believes that the heavy correction in South Korea’s equity market was driven by heavy selling by foreign investors, slowing institutional support and volatility due to the rapid growth in leveraged ETFs and newly launched single-stock leveraged products.

“We believe these factors led to amplified volatility despite resilient corporate fundamentals. As market “deleveraging” progresses and foreign selling pressure eases, the next leg of Korea's rerating is likely to be supported by corporate share buybacks and treasury-share cancellations, particularly from large-cap companies, in our view,” the international brokerage said, adding that this should become a new structural source of demand and help the Kospi re-rate toward the 10,000-11,000 target.

Citi recently downgraded South Korea’s stock market to a neutral stance after keeping it overweight for the past year, citing heightened volatility in AI-linked chip stocks. Despite the downgrade, Citi said it remains structurally positive on the long-term artificial intelligence investment theme. According to Reuters, the bank has opted to reduce its tactical exposure to South Korea while keeping an overweight position on Taiwan and upgrading China to an overweight in its emerging markets allocation.


Also read | Kospi’s mammoth 17% surge spells caution for Indian IT stocks. Why TCS, Infosys, others are down up to 5%

(With inputs from agencies)

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