Asian equity markets, especially Taiwan and South Korea, saw a substantial deleveraging event as retail investors unwound margin loans following a brutal sell-off in artificial intelligence (AI) related stocks. Taiwan's stock market, the TAIEX, fell nearly 9,000 points from its record high to an intraday low of 39,384, experiencing its biggest monthly point decline on record. Combined margin balances on Taiwan's market fell by a single-day record of NT$52.1 billion ($1.61 billion), indicating that much of the leveraged selling pressure had likely been flushed out.
The correction was particularly steep in semiconductor stocks, which saw a 21% drop in July, despite strong underlying demand for AI technologies. South Korean equities also faced severe deleveraging, with more than $2 trillion wiped off the country's stock market. This sell-off was concentrated in chipmakers, raising concerns about the returns on massive AI investments. The Kospi was on track for a 12% weekly fall, and the Philadelphia Semiconductor Index continued to face downward pressure.
Despite the immediate pain and volatility, some analysts believe the margin unwind and subsequent price corrections could be a healthy development. Gina Kim, a portfolio manager at Nordea Asset Management, suggested that the selling contained an "irrational, panic-like element" and that the declining margin balances in both Taiwan and Korea could signal that the market is closer to forming a bottom. While a rapid V-shaped recovery is unlikely, the clearing of froth through deleveraging may pave the way for a more sustainable rebound as valuations become more appealing to investors. The National Stabilization Fund in Taiwan is also monitoring the situation and prepared to take measures to prevent market disorder.
