Key Takeaways:
South Korea's benchmark Kospi Index suffered its worst selloff in decades, triggering a second straight circuit breaker as retail investors dumped shares and policy makers scrambled to contain the damage from leveraged ETF products.
The Kospi slid as much as 13% to below the 6,000 mark on Wednesday before paring losses to about 6% in afternoon trading, extending a monthly decline of roughly 33% — a record for the gauge. The Kosdaq Index of smaller companies also fell more than 10%, triggering its own trading halt. Retail investors sold 1.8 trillion won ($1.3 billion) of Kospi stocks, a sharp reversal from their earlier pattern of dip-buying, according to exchange data.
"People seem to be just running away," said Yoon Joonwon, a fund manager at DS Asset Management. "Technically or emotionally, this is irrational selling."
The rout was led by SK Hynix Inc. and Samsung Electronics Co., which together account for nearly half of the Kospi's market capitalization. SK Hynix tumbled as much as 20%, extending a two-day drop that reached 30% at one point, after its earnings call with analysts offered scant details on shareholder returns and long-term contract pricing. The company reported a six-fold surge in quarterly profit and said it would boost capital spending to at least $31 billion. Samsung Electronics fell as much as 14%.
"SK Hynix is lifting capex to the high 40 trillion won range, while staying silent on shareholder returns and the pricing inside its long-term contracts, and that's left investors feeling uneasy," said Josh Gilbert, lead analyst for Asia Pacific and the Middle East at Etoro Ltd. "Given the weight of SK Hynix and Samsung on the Kospi, there's nowhere to hide when they fall together."
Policy makers apologize as leveraged ETFs amplify losses
Finance Minister Koo Yun-cheol apologized during a parliamentary session on Wednesday for introducing single-stock leveraged ETFs without adequate safeguards, responding to a lawmaker's demand for accountability. Lee Eog-weon, chairman of the Financial Services Commission, also expressed regret, saying the regulator had "fallen short in properly meeting the public's expectations" over overseeing the products.
The government is now considering raising transaction costs to curb speculation in leveraged ETFs, according to officials familiar with the matter. The products, mostly tied to Samsung Electronics and SK Hynix, had attracted heavy retail inflows earlier this year as investors bet on sustained AI-driven demand for memory chips. The subsequent collapse has triggered forced liquidations and margin calls, compounding the selling pressure.
"The most immediate possibility would be to deploy the market stabilization fund, encourage institutional investors such as the National Pension Service to rebalance into domestic equities, and provide liquidity through state-backed institutions," said Jung In Yun, chief executive officer at Fibonacci Asset Management Global.
Circuit breakers and the scale of the selloff
Of the 15 circuit breakers triggered in the Kospi since 2000, nine have taken place this year alone, underscoring the severity of the current downturn. The back-to-back suspensions on Tuesday and Wednesday were unprecedented for the benchmark.
The selloff reflects a broader reassessment of the AI trade that had powered South Korean equities to world-beating gains earlier this year. SK Hynix shares have fallen since June as doubts grew about whether global AI spending — particularly by big tech firms such as Meta Platforms Inc. — would justify the chip sector's elevated valuations. Recent technological advances by Chinese competitors added to the caution.
Investors are now awaiting earnings results from Samsung Electronics on Thursday and from major US technology companies later this week, which could provide further direction for the market.
This article is for informational purposes only and does not constitute investment advice.
