The most acute phase of the turmoil in South Korea's stock market may be over. Last week, the country's equity volatility index fell to a two-month low after climbing to a historic peak in June. The stabilization follows a historic selloff that cleared leveraged positions, along with regulatory restrictions that drove a sharp decline in trading of certain high-risk products. Forced liquidations have reduced outstanding margin debt, and tighter oversight of leveraged ETFs has also cut trading volumes and asset sizes for products tied to chip giants Samsung Electronics and SK Hynix. These developments suggest that much of the excess capital fueling the leveraged, localized swings has been flushed out. Morgan Stanley estimates the deleveraging process is more than halfway done. The KOSPI has lost nearly 40% from its June high, and global funds have sold over $100 billion in Korean equities this year, leaving emerging-market fund positions in the country in a weakened state.
South Korea's stock market appears to be moving past its most violent stretch. The country's volatility index fell last week to its lowest level in two months, after hitting a record high in June. That turnaround comes after a historic selloff removed much of the market's leveraged positioning, while tighter regulatory limits pushed trading in some high-risk products down sharply.
The calmer conditions owe much to forced liquidation, which has helped trim outstanding margin debt. At the same time, stricter oversight of leveraged ETFs has reduced both trading volume and assets under management for products tied to Samsung Electronics and SK Hynix. Together, the data points suggest part of the excess capital that had amplified bouts of sharp, localized volatility has now been cleaned out.
Morgan Stanley estimates the deleveraging process is more than halfway complete. The KOSPI is still down nearly 40% from a June peak. Global funds have sold more than $100 billion of Korean stocks so far this year, leaving emerging-market fund allocations to the country at a relatively weak level.
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