South Korean stocks experienced a significant jump, driven by the belief among brokers that the unwinding of leveraged bets, a primary factor in the benchmark KOSPI's nearly $30% decline from its peak, is reaching its conclusion. This positive sentiment suggests an end to the period of forced selling and market volatility.
The KOSPI had fallen $30% from its June 19 peak within just 20 trading sessions due to the liquidation of millions of retail accounts and the unwinding of leveraged positions. This sell-off resulted in Samsung Electronics losing a quarter of its market capitalization and SK Hynix shedding a third. Margin loans used for stock purchases dropped to $22.6 billion ($33.4 trillion won) by July 16, the lowest since April 15, and a $13% decrease from the peak of $38.6 trillion won at the end of June. Investor deposits also declined to $108.1 trillion won from a June 4 peak of $139.7 trillion won.
JPMorgan Chase & Co. strategists, including Mixo Das, noted that while the Korean market's fundamentals remain solid, an intense period of deleveraging has pushed equity prices lower. They described the situation as a "self-correcting mechanism" activated by the rapid pace of gains, which led to elevated volatility and forced foreign selling. Approximately 1.2 million accounts, or $10% of all South Korean brokerage accounts, faced margin calls, forcing investors to liquidate holdings and contributing to the broad market correction.
Further analysis by JPMorgan attributed much of the KOSPI's $28% fall from its June 19 high to leveraged ETFs, which amplified an initial correction driven by fundamental concerns. The net assets of leveraged ETFs based on South Korean assets had surged to $50 billion by the end of June, about four times the size of the U.S. market relative to its scale. This led to repeated forced deleveraging during the downturn, causing the South Korean volatility index (VKOSPI) to expand to about five times the level of the U.S. VIX. JPMorgan believes significant deleveraging has occurred, with leveraged ETFs reduced by approximately $75% towards an appropriate size of $18 billion. Foreign selling pressure is also reported to be easing, with foreign investors net-buying substantially in recent days, and the market's attention is expected to shift towards corporate earnings.
