South Korea’s KOSPI closed down 5% at 6,257 on Aug. 3, giving back part of the roughly 20% rebound seen late last week. The latest market data showed pressure building on several fronts at once: leveraged retail accounts continued to be forced out, money kept moving from equities into bank deposits, and regulators pressed ahead with tighter controls on single-stock leveraged exchange-traded funds.
With President Lee Jae-myung’s approval rating at its lowest level since he took office and financial authorities stepping up intervention, the next move in Korean stocks has become a closely watched question for local investors and global markets alike.
More than 500,000 leveraged retail accounts may have been wiped out
On July 30, financial account The Kobeissi Letter said in a post on X, citing Goldman Sachs data, that more than 1.2 million leveraged retail trading accounts in South Korea had received margin calls as of July 13. It estimated that 320,000 to 360,000 of those accounts had already been fully liquidated, equal to about 3.4% of the country’s adult population.
Odaily, as cited in the source piece, noted that this would imply roughly one in every 30 Korean adults faced the possibility of a complete wipeout.
The report added that because the KOSPI had fallen about 18% since July 13, the number of accounts that were fully forced out by now was estimated to have exceeded 500,000. Although the KOSPI and shares such as Samsung Electronics and SK Hynix rebounded sharply on July 31, those liquidated accounts had already been removed from the market.
Money shifted out of stocks and into bank deposits
The report said funds waiting to be deployed into Korean equities have been leaving the market as the semiconductor sector adjusts and oversight of leveraged trading tightens.
As of the end of July, term deposits at South Korea’s five major banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — stood at 973.49 trillion won, up 24.09 trillion won from the end of the prior month. That was the biggest monthly increase this year.
Data from the Korea Financial Investment Association showed that investor brokerage-account deposits, cash parked for stock purchases, hit a record 139.69 trillion won on June 4. By July 28, that figure had fallen to 107.20 trillion won, a drop of more than 32 trillion won in less than two months.
Over the same period, margin financing balances, a gauge of leveraged stock-market activity, fell to 33.19 trillion won. That was about 4.5 trillion won below the July 2 peak of 37.72 trillion won, a decline of roughly 12%.
Investor deposits fell by more than 35 trillion won from the peak
Figures released by the Korea Financial Investment Association on Aug. 3 showed investor deposits stood at 104.6584 trillion won as of July 30, the day KOSPI marked a recent low.
Compared with the all-time high of 139.6948 trillion won reached on June 4, that meant a decline of more than 35 trillion won in about two months.
The source article said average daily investor deposits in July dropped by nearly 20 trillion won from the previous month and were about 10 trillion won lower than in March. It also said 85% of household loan capacity had already been used in the first half of the year and pointed to Bank of Korea rate hikes as another sign that market liquidity could remain tight in the near term.
Regulators moved to tighten controls on single-stock leveraged ETFs
After the violent swings seen in July, South Korea’s Financial Services Commission, or FSC, and the Financial Supervisory Service, or FSS, have been working on both legal revisions and higher margin requirements aimed at reducing volatility tied to single-stock leveraged ETFs.
According to the report, the FSC and the FSS have begun revising the Capital Markets Act, focusing on single-stock leveraged ETFs that authorities believe amplified volatility during the recent sell-off. Measures under discussion include changing leverage ratios, capping investment amounts and giving regulators an emergency intervention tool that could be used during periods of unusual market stress.
Some single-stock leveraged ETFs in South Korea currently offer leverage of up to 2x. Regulators are discussing whether they should be allowed to cut that leverage temporarily during abnormal market swings to reduce risks from concentrated trading. The article said the approach references recent regulatory steps in Hong Kong.
Authorities also believe the current framework, under which changes to return structures may require approval from fund holders’ meetings, is too slow for extreme market conditions. They are looking at a mechanism that can be activated without going through a complicated process.
Other options under consideration include setting individual investment limits for single-stock leveraged ETFs, keeping the cap at around 20% to prevent excessive concentration of funds, and introducing a simulated-trading system so investors can better understand the risks of leveraged products. The report said regulators view higher basic margin as a way to raise the entry threshold, while position limits would act as a ceiling on inflows.
Trading in affected ETFs dropped 75.3% on day one of the new rule
Local media reports said that starting July 31, South Korean financial regulators raised the minimum margin requirement for investors in single-stock leveraged ETFs to 30 million won from 10 million won. On the first day of the new rule, total trading volume in 16 single-stock leveraged and inverse ETFs came to 3.3071 trillion won.
That was down 75.3% from 12.4485 trillion won on July 30. It also marked a steep drop from the July daily average of 12.27 trillion won. Excluding inverse products, turnover in 14 major single-stock leveraged ETFs fell 64.4%, from 6.9354 trillion won to 2.4686 trillion won.
The article said many in the Korean market now see single-stock leveraged ETFs as one of the main amplifiers behind the recent sell-off, with some arguing that products tied to names such as SK Hynix intensified volatility and contributed to investor losses worth billions of dollars.
It also said Kim Yong-beom, head of the policy office in the presidential office, has been accused of abuse of power, coercion and obstruction of business over allegations that he pushed for the listing of leveraged ETFs tied to individual semiconductor stocks. Former Seoul city council member Lee Jong-bae, a conservative backed by the opposition People Power Party, has filed a related criminal complaint.
Lee Jae-myung’s approval rating fell to a low for his term
Political pressure has risen alongside the market turmoil.
A poll released on Aug. 3 showed Lee Jae-myung’s approval rating fell to its lowest level since he took office in June last year, according to the article. The survey, conducted by Realmeter and commissioned by media outlet EKN, found Lee’s positive rating slipped 0.4 percentage point from a week earlier to 45.9%, marking a third straight weekly decline. His negative rating rose 1 percentage point to 50.5%, the first time it moved above 50%.
A separate poll by the same agency showed support for the ruling Democratic Party at 45.1%, up 3.8 percentage points from the previous week, while support for the main opposition People Power Party fell 2.9 percentage points to 37.7%.
Foreign inflows surged as Morgan Stanley lifted Korea to overweight
After a weak July, the KOSPI jumped more than 17% intraday on July 31, its biggest single-day gain on record. Some investors saw that rally as an early sign of a turnaround. Others argued it only highlighted how dependent Korean equities remain on foreign flows and how quickly sentiment can swing.
Data cited in the report showed foreign investors were net buyers of 1.6 trillion won worth of Korean stocks within just over two minutes of the open that day. By the close, foreign net buying had reached 7.18 trillion won, the highest daily total on record. Korean retail investors moved the other way, posting net sales of 8.2 trillion won, also a record daily figure.
Morgan Stanley on the same day upgraded Korean equities to overweight from equal-weight. Strategists including Daniel K Blake said the recent leverage washout had created a better entry point for investors looking at artificial intelligence trades and the industrial supercycle theme.
Those strategists said the KOSPI still had 36% upside to their 9,000 target as crowded trades and leveraged positions were unwound. Morgan Stanley described the recent selloff as “mainly technical” and said deleveraging in leveraged ETFs, hedge fund leverage and retail margin trading was already more than halfway complete.
The bank expects the KOSPI to trade in a 5,500 to 10,500 range in the near term. It also said Samsung Electronics and SK Hynix should provide valuation support, while industrial, defense and financial stocks may benefit from favorable factors.