Korean KOSPI Index

The KOSPI fell more than -5% on Monday, giving back part of Friday’s record +18% bounce as traders locked in short-term profits and further unwound leverage-driven positions. Samsung Electronics and SK Hynix each dropped around 9%, while foreign investors were net sellers, retail investors bought the dip. President Lee Jae Myung is facing mounting scrutiny following the market’s recent extreme volatility, although support may be in the offing with Morgan Stanley upgrading Korean equities, arguing valuations are now below previous cycle lows and forecasting around 36% upside to a 9,000 KOSPI target.

• While value has become interesting, the China cloud is building over the chip stocks, and we feel volatility is likely to remain elevated in the weeks ahead.

The recent collapse in the KOSPI, and, by extension, much of its prior surge, has been largely blamed on leveraged ETFs, prompting calls for regulators to tighten oversight. Since US regulators streamlined ETF approvals in 2019, more than 450 leveraged and inverse single-stock ETFs have launched, offering amplified exposure that can diverge sharply from the underlying stock over time due to daily rebalancing and compounding – 2 leveraged ETFs have already been established for SpaceX! Although designed for short-term trading, these products are increasingly held by retail investors and can amplify volatility, particularly when concentrated in a single stocks or sector, as South Korea’s recent market swings demonstrate.

• We expect a choppy August for the KOSPI, but from a trading perspective it feels time to buy new lows.