Global Market: South Korea's AI-driven stock frenzy fuels volatility, challenges market fundamentals

South Korea's stock market has become increasingly volatile as billions of dollars in leveraged bets on the country's AI-focused chipmakers reshape trading dynamics, turning what was once considered a reliable barometer of global growth into a market driven more by speculative flows than economic fundamentals, according to a Reuters report.

The sharp swings have unsettled investors and regulators alike, with market movements increasingly driven by leveraged investment products rather than corporate fundamentals. The volatility has also complicated the assessment of South Korean equities, particularly as the country remains a critical supplier of AI-related semiconductor technology.

The benchmark KOSPI has experienced an unprecedented surge in volatility this year. More than half of all circuit breakers in the index's history—temporary trading halts triggered when the benchmark falls more than 8% for at least one minute—have occurred during the past six months, Reuters reported.


Market strategists say traditional indicators that once guided investment decisions have become less reliable as massive capital inflows into leveraged single-stock exchange-traded funds (ETFs) dominate trading activity.

These funds are heavily concentrated in AI chipmakers Samsung Electronics and SK Hynix, whose combined market capitalization now accounts for more than half of the KOSPI index.

Despite their dominant market position, valuations remain subdued. Price-to-earnings ratios for Samsung Electronics and SK Hynix have fallen below five, suggesting the market is not fully reflecting future earnings expectations even as AI demand remains strong.

The KOSPI has also diverged from its historical relationship with global markets. Volatility has surged after the benchmark doubled in market value within six months before retreating about 20% so far this month. The market's movements are now increasingly influencing overseas trading, including on Wall Street, rather than simply tracking U.S. benchmarks.

Retail participation has played a significant role in the market's transformation. Margin loans held by South Korean retail investors stood at 34.37 trillion won ($23 billion) this week, slightly below the record 38.6 trillion won reached in June.

The rally has been further amplified by concentrated positions in leveraged single-stock ETFs. Assets in a Hong Kong-listed fund offering twice the daily return of SK Hynix have surged more than twentyfold since the start of the year to $7.78 billion, making it the world's largest fund of its kind.

Large rebalancing trades from these leveraged products have become substantial enough to influence prices of the underlying shares, raising concerns among global asset managers over the sustainability of the trend.

South Korean regulators have begun taking steps to curb excessive speculation without triggering broader market disruption. Reuters reported that authorities have halted approvals for new single-stock leveraged ETFs and will triple the minimum cash balance required to trade such products—including overseas-listed funds—to 30 million won ($20,300) from August 5.

Market participants largely welcomed the move, saying efforts to shift attention back toward company fundamentals could improve long-term market stability.

Despite the concerns, the speculative surge has also benefited South Korea's leading semiconductor firms. Reuters reported that strong investor demand enabled SK Hynix to complete a record $26.5 billion U.S. capital raising by a foreign company last week.

Global investors continue to closely monitor developments in the Korean market, viewing it as an important indicator of sentiment surrounding AI-related investments. According to Reuters, many fund managers see the potential AI bubble as one of the biggest risks facing global markets, making South Korea's experience particularly significant for investors worldwide.