KOSPI crash 22% in 5 weeks as leveraged ETFs trigger $108 billion selloff

The KOSPI plunged 22% from its June 22 peak of 9,115 to 6,691 by July 24, wiping out 158 trillion won ($108 billion) in foreign-held value as a leveraged ETF unwind triggered forced selling.

"This was a liquidity-driven reset, not a deterioration in fundamentals," a Nomura strategist said in a July 28 research note. "The market is transitioning from a leverage-driven rally to one powered by record corporate buybacks."

Foreign institutions sold a net 158 trillion won of KOSPI stocks year-to-date, with the pace accelerating as Korea's weighting in MSCI indices exceeded portfolio limits. Single-stock leveraged ETFs — 85% held by retail investors — lost 53% of their value since the June peak, more than double the index decline. The K-VIX hit a record 96.9 on June 29. South Korea's Financial Services Commission responded on July 16 by raising minimum margin requirements to 30 million won from 10 million won and capping purchases at 20 shares per transaction. Finance Minister Koo Yun-cheol apologized to parliament on July 29 for introducing the products "without careful consideration."

The selloff reset valuations to 7 times 2026 earnings, a 33% discount to Nomura's 10,000 to 11,000 target. The path back depends on a structural shift from leverage-driven speculation to a buyback-driven market, with two semiconductor giants expected to account for 90% of a record 116 trillion won in repurchases this year.

Foreign Selling Eases as Leveraged ETF AUM Shrinks

The pace of foreign outflows slowed sharply in July. Net selling through the 24th totaled 9.8 trillion won, down from 48.4 trillion won in May and 44.5 trillion won in June, Nomura data show. Leveraged ETF assets under management contracted from their peak, reducing the ammunition for volatility amplification. Retail investors also turned cautious, with dip-buying activity declining.

The July 16 regulatory crackdown targeted the most volatile corner of the market. Single-stock leveraged ETFs — all tied to Samsung Electronics and SK Hynix — accounted for 1.1 trillion won, or about 40% of total leveraged ETF assets. The new rules also suspended new product listings and advertising and tightened liquidity provider requirements.

Buyback Engine Replaces Leverage as Next Growth Driver

Nomura projects Korean corporate buybacks will reach 116 trillion won in 2026, 274 trillion won in 2027, and 328 trillion won in 2028 — equivalent to 2.2% of current market capitalization, far above the 0.2% to 0.9% range from 2018 to 2025. About 90% of the repurchase funding will come from Samsung Electronics and SK Hynix, which are using employee bonuses and shareholder return programs to buy back stock.

The shift coincides with government efforts to improve corporate governance. A list of low price-to-book companies expected in November is seen as the most direct catalyst for share buybacks, dividend increases, and non-core asset sales. Tighter rules on dual listings and KOSDAQ reforms are also expected to reduce the conglomerate discount.

The KOSPI's AI-driven earnings supercycle remains intact. Nomura forecasts 2026 net profit growth of 253% and 2027 growth of 35%, with return on equity reaching 27% and 29% respectively. The index currently trades at 1.7 times book value against a target of 2.5 to 2.8 times.

The selloff in Korean chip stocks has been brutal. Samsung Electronics fell as much as 14% on July 29, while SK Hynix plunged nearly 20% despite reporting record quarterly earnings. The declines were amplified by cross-market arbitrage: the launch of SK Hynix American depositary receipts in the U.S. triggered a "long ADR, short Korean common stock" trade that added selling pressure on domestic shares.

The KOSPI's recovery hinges on three factors: the pace of foreign selling stabilization, the November low-PBR company list, and the second-half tax reform package. Nomura maintains its 10,000 to 11,000 target, implying 50% to 64% upside from the July 24 close.

This article is for informational purposes only and does not constitute investment advice.