[Yonhap]
[Yonhap]

Major foreign investment banks have increasingly pointed to single-stock leveraged ETFs tied to Samsung Electronics and SK Hynix as a key driver of the extreme volatility that has gripped South Korea's stock market in recent days. The worst of the selloff appeared to ease, however, as the domestic market staged a sharp rebound within a single trading session.

According to a report titled "Foreign Views on Recent Domestic Share Price Volatility" released Wednesday by the Korea Center for International Finance, JPMorgan Private Bank said leveraged ETFs "can amplify short-term volatility without affecting fundamentals, creating overheating risks in both directions — up and down."

Goldman Sachs similarly assessed the Kospi's steep drop of 9 percent on Monday — along with declines of 10.1 percent for Samsung Electronics and 17.0 percent for SK Hynix — as the result of forced liquidations of leveraged products and a deterioration in investor sentiment, rather than any worsening of corporate earnings or fundamentals. Some analysts say the heavy concentration of retail investor money in single-stock leveraged ETFs, on top of already crowded positions in Samsung Electronics and SK Hynix, amplified the market's overall vulnerability.

Hong Kong-based brokerage Futu Securities offered a similar view. "A significant number of retail investors are using leverage, leaving the market with no structural buffer against a downturn," the firm said, adding that what might have been a routine market correction cascaded into a mechanical freefall as margin calls and forced liquidations followed in domino fashion immediately after semiconductor stocks began falling.

Bloomberg also assessed the recent domestic market correction as driven more by profit-taking and global portfolio rebalancing than by any deterioration in economic fundamentals. It noted that the correction was particularly sharp because gains had been excessively concentrated in large-cap semiconductor stocks and leveraged products.

Against this backdrop of overseas assessments, the domestic market mounted a strong recovery Wednesday. The Kospi climbed more than 6 percent during trading to reclaim the 7,000 level, with both institutional and foreign investors posting net purchases that drove the index higher. Buying was so intense shortly after the open that a program buy-side sidecar — a temporary suspension of program buy orders — was triggered.

Semiconductor stocks rebounded across the board. Samsung Electronics rose more than 6 percent during trading and SK Hynix surged more than 10 percent, recovering a substantial portion of their recent losses. SK Square and Samsung Electro-Mechanics also posted double-digit gains, while Hanmi Semiconductor jumped more than 20 percent after reporting its best quarterly earnings on record.

Market participants attributed the rebound to a technical recovery from the recent sharp drop, combined with renewed long-term growth expectations for the semiconductor sector.

Heo Jae-hwan, a researcher at Eugene Investment & Securities, said large US banks remain in good health when looking at financial stocks — the sector most sensitive to economic and credit risk. "Banks say credit conditions and consumer spending are solid," he said. "Domestic companies outside semiconductors are not in the best shape, but Korean bank stocks have held up reasonably well. By the same logic as the US, the concentration was extreme, but this is not a crisis."

Expectations for regulatory reform targeting single-stock leveraged ETFs — identified as a key source of the recent volatility — also helped partially restore investor confidence, some analysts said.

Kang Jin-hyeok, a researcher at Shinhan Investment, said that "as discussions have begun on raising minimum deposit requirements and strengthening the market-stabilization role of liquidity providers, expectations appear to be growing that volatility from crowded positions will ease."

Foreign institutions warned that prolonged high volatility could weigh on the real economy. Bloomberg raised the possibility that share price swings could dampen consumer sentiment and worsen corporate financing conditions, and said the Bank of Korea would find it difficult to pursue aggressive tightening. Reuters also noted that while earnings growth at Samsung Electronics and SK Hynix remains solid, the concentration of gains in a handful of stocks has increased investors' exposure to volatility.

Citigroup, by contrast, said the Kospi correction could reduce foreign demand for won-selling as a currency hedge, potentially generating upward pressure on the won in the foreign exchange market.

Some market participants cautioned that it is too early to declare the volatile period over on the strength of a single-session rebound. Still, the fact that major foreign investment banks are attributing the recent plunge to leveraged products and supply-demand dynamics rather than corporate fundamentals has led some to suggest that, if excessive leverage concentration eases, the market could return to a more normal, earnings-driven trajectory.


rainbow@heraldcorp.com