South Korea’s Extreme Market Swings Subside as Leverage Unwinds

South Korea’s Stock Volatility Eases as Forced Selling Recedes

The worst of South Korea’s extraordinary stock-market turbulence appears to be over. After the Kospi index fell nearly 40% from its June peak – driven by a violent unwinding of leveraged retail positions – the country’s equity volatility gauge has dropped to a two-month low from its June record of 96.9. Forced liquidations, which wiped out roughly 1 trillion won ($710 million) of retail accounts in June and another 993 billion won in July, have eased significantly, and outstanding margin loans shrank to 27.4 trillion won, the lowest level this year.

The Kospi’s historic swings triggered the 20-minute market-wide trading halt a record four times in July. In that month alone, the index moved 5% or more on nearly half of all trading days, including an unprecedented 18% one-day surge on July 31. Regulators responded by raising cash deposit requirements for single-stock leveraged exchange-traded funds, a move that quickly dampened trading volumes and assets in leveraged products tied to Samsung Electronics and SK Hynix, the market’s heavyweight semiconductor names.

Despite the calming, foreign investors continue to retreat, though at a decelerating pace. After a record $30 billion outflow in June, overseas funds withdrew $6.2 billion in July and a further $4.3 billion in early August. Yet valuation metrics are flashing a stark invitation: the Kospi trades at just 5.1 times projected 12-month earnings, a record low. Goldman Sachs has stuck to its 12-month Kospi target of 12,000, implying roughly 90% upside from Friday’s close, betting on a strong earnings recovery from Korean chipmakers.

What The Ebbing Leverage Storm Means for Korean Equities

How Deleveraging Cooled the Sell-Off

The heart of the crisis was a vicious feedback loop: retail investors who had piled into leveraged products faced margin calls as prices fell, forcing liquidations that pushed prices even lower, triggering more margin calls. With the worst of those forced sales now behind it – Morgan Stanley estimates the market is more than halfway through the deleveraging process – the amplifier has lost its power. Outstanding margin loans at a year-low confirm that the pool of fragile positions has shrunk, meaning price moves are no longer magnified by a cascade of forced selling.

Morgan Stanley’s Midpoint Assessment

The bank’s call that deleveraging is now more than 50% complete suggests the Kospi has entered a less chaotic phase. While leftover leverage could still produce sharp, but likely smaller, drawdowns, the probability of the kind of 5%-plus daily swings seen in July has diminished. This shift matters because it restores a modicum of predictability, allowing fundamental-driven investors to return without fear of being whipsawed by technical liquidations.

The Regulatory Curb on ETF Leverage

Regulators deliberately cooled one of the hottest pockets of speculative excess by forcing higher cash deposits on leveraged single-stock ETFs from July 31. The result was immediate: trading volumes dried up in products linked to Samsung Electronics and SK Hynix, two of the most actively traded names. While authorities may not tighten rules further, the message is clear – they are willing to intervene to prevent leveraged products from destabilising the broader market. That backstop, however, also means leveraged long positions, which could power a fast rebound, are now harder to build.

Foreign Selling Slows But Hasn’t Stopped

Overseas investors remain net sellers, but the scale has fallen from a devastating $30 billion in June to a more manageable $4.3 billion in the first week of August. If this trend continues, the last major headwind could abate. However, any escalation in global trade tensions or signs of a semiconductor demand slowdown could easily turn the flow negative again, given foreigners still hold a substantial share of the Kospi’s market cap. The deceleration is encouraging, but it is not yet a reversal.

The Valuation Temptation and Goldman’s 90% Upside Call

The Kospi’s price-to-earnings multiple of 5.1x projected profits is historically extreme and explicitly pricing in a deep earnings recession that current semiconductor order books do not yet show. Goldman’s target of 12,000 on the index implies that if deleveraging continues and foreign selling stops, the re-rating alone could deliver substantial gains. The risk remains that the market is correctly discounting a chip downcycle that hasn’t fully materialised in official forecasts, a possibility that keeps this a high-conviction but high-uncertainty opportunity.

What Investors Should Watch Now

• Watch daily foreign net selling data. After a record $30B June outflow, the pace has slowed to roughly $4B in early August. A sustained pause or a few net buying sessions would be the strongest signal that the liquidity drain is over.
• The forced-selling overhang is largely cleared. With margin loans at 27.4 trillion won (a 2026 low) and forced liquidations of 1 trillion won/month in June and July now behind, the reflexive selling spiral is broken. Any further deleveraging is likely to be gradual and less disruptive to prices.
• Monitor regulatory posture on leveraged products. The cash deposit hike for single-stock ETFs shows the Financial Services Commission will act. If new curbs emerge, they could cap speculative upside but also reinforce market stability – a net positive for longer-term investors, but a dampener for near-term momentum traders.
• Revisit semiconductor earnings forecasts. Goldman’s 12,000 Kospi target hinges on chip earnings staying strong. Watch quarterly guidance from Samsung Electronics and SK Hynix for any cracks; a negative pre-announcement would undermine the valuation support rapidly.