South Korea's KOSPI 200 Volatility Index (VKOSPI), often dubbed the country's "fear gauge," has plummeted for seven consecutive trading sessions, reaching its lowest level in three months. The index stood at 54.96 as of August 13, a significant drop from its July 29 peak of 93.27, representing a decline of over 41%. This stabilization follows a period of extreme market volatility in June and July, during which the VKOSPI hit a record high of 97.99, and the KOSPI index experienced a nearly 40% drawdown from its June high.
The decline in volatility is largely attributed to South Korean financial authorities implementing leverage restrictions. On July 31, the base margin requirement for single-stock leveraged and inverse products was raised from 10 million won (approximately $7,000) to 30 million won (approximately $21,000), along with other supplementary measures. These regulations led to a drastic reduction in trading value for single-stock leveraged and inverse products, which plunged 94% from $8.7 billion on July 30 to $525 million by August 11. Morgan Stanley estimates that the deleveraging process is more than half complete, with over $1 billion in leveraged ETF outflows in August 2026.
However, a "balloon effect" has emerged, with demand shifting to other leveraged offerings. Investors have moved from single-stock products to KOSDAQ 150 leveraged, semiconductor leveraged, and KOSPI 200 leveraged and inverse products. For instance, KODEX Leverage attracted $170.6 million in inflows, and KODEX Semiconductor Leverage, heavily weighted with Samsung Electronics and SK Hynix, saw trading values of $160.3 million. Despite these shifts, experts like Jeong Hyeon-jong of Korea Investment & Securities caution that weakening semiconductor momentum is a fundamental driver of reduced trading activity, and a rebound in Samsung Electronics and SK Hynix could reignite leveraged demand, making it premature to declare the regulatory measures a complete success.
While South Korean stocks appear cheap, with the KOSPI trading at a record-low 5.1 times its 12-month forward earnings, global investors remain cautious. Foreign funds have continued to sell, offloading $30 billion in June, $6.2 billion in July, and $4.3 billion so far in August. Investment managers like Isaac Thong of Aberdeen Asian Income Fund note that while they are becoming more constructive, volatility remains elevated, preventing a full return to comfort. Maxence Visseau of Arkevium Capital emphasizes the need for consistent calmer trading days to convince foreign portfolio managers that the market's price-discovery mechanism is functioning normally again.
