South Korean stocks surge as leveraged ETF unwind nears end
South Korea's Kospi rallied 6% as brokers said the bulk of deleveraging in leveraged ETFs is complete, potentially marking a turning point after a $1.2 trillion selloff.
South Korean equities surged on Wednesday, with the benchmark Kospi jumping more than 6% as the forced selling of leveraged positions that pushed the index nearly 30% below its June peak showed signs of exhaustion.
The rally extended the index's two-day gains to almost 10%, providing a sharp reversal after weeks of intense volatility that erased roughly $1.2 trillion in market capitalization. The selling pressure had been driven primarily by the unwinding of leveraged exchange-traded funds and a reduction in retail margin loans, compounded by concerns over the memory chip cycle.
Data suggests the deleveraging process is largely finished. JPMorgan Chase & Co. strategists, including Mixo Das, estimated in a recent report that about 75% of the leverage in ETF positions has been unwound. Separate figures from the Korea Financial Investment Association show domestic investors cut their leveraged stock holdings to a three-month low by July 16. The outstanding balance of margin loans fell to 33.4 trillion won, a 13% drop from its late June peak.
"With toxic leverage now significantly reduced, risk-reward ratios have turned considerably favorable," wrote Peter Park, a Korea equity sales associate at NH Investment & Securities Co.
The immediate market reaction was heavily concentrated in the semiconductor sector, which has been at the center of the recent macroeconomic anxiety. SK Hynix Inc. led the gains, soaring more than 9% after its American depositary receipt closed up 14% on improved artificial-intelligence sentiment. Proxy trade SK Square Co. also advanced, while chip heavyweight Samsung Electronics Co. climbed more than 6%.
The sheer scale of the recent volatility prompted regulatory intervention. Korea Exchange briefly suspended program buying on Wednesday, a circuit-breaker mechanism that has become common in the $4 trillion market as its recent price swings exceeded those of Bitcoin.
For market participants, the combination of exhausted margin selling and stabilized chip sentiment presents a technical recovery. However, the broader sustainability of the rebound will ultimately depend on whether the fundamental demand for artificial intelligence memory chips justifies current valuations after such a severe correction.
