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

South Korean retail investors are protesting the government's handling of single-stock leveraged funds, which many blame for fueling the Kospi’s meteoric rally and subsequent crash this year that wiped out nearly $2 trillion in investor wealth. The backlash comes after the country’s finance minister apologised for introducing the leveraged products without adequate consideration.

Kospi skyrocketed over 122% since the beginning of the year to hit a lifetime high of 9,386 in June on the back of 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 on the coffin was likely to be the single-stock leveraged ETFs linked to these two chipmakers, which seemed to further increase the concentration risks, leading to Kospi spiralling down 40% in just a little over a month to close at 5,593.56 today.


South Korea's Finance Minister apologises

During a parliamentary session, South Korea’s Finance Minister 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 in the Seoul bourse.

South Korea’s President Lee Jae Myung recently said, “Our domestic stock market is quite unstable.” He noted that since the country’s stock market experienced a historically unprecedented massive surge in such a short period, it would require time and fluctuation to stabilise.

However, Koo’s apology was not enough to soothe retail investors who lost massive wealth after these leveraged products wreaked havoc in the country’s financial markets. South Korea’s local investors, including young people, pensioners, parents and more, who borrowed money and piled in late are hurting the most of all.

Also read | Is Korean stock market turning into open casino? How retail leverage is fueling wild swings

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 pay back time, I will repay next time I vote," read another.

Can South Korea's Kospi rebound?

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 Kospi re-rate toward 10,000-11,000 target.

"Seoul will learn to live ⁠with stock market volatility," analysts from Eurasia Group wrote in a research note, cited by Reuters. "Large daily fluctuations are mostly divorced from market fundamentals, though; corporate profits remain at record highs,” they added.

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 | Global chip rout: How should investors play India's AI trade that gave up to 400% returns this year?

(With inputs from agencies)
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