KOSPI plummets below 8,000 points amid semiconductor stock volatility

South Korea's main stock index, the KOSPI, plummeted below the 8,000-point mark just two weeks after achieving a historic high of 9,000 points. This rapid descent mirrors the speed of its ascent, underscoring the market's extreme volatility. The primary driver behind these dramatic swings is the heavy concentration of investment in semiconductor stocks, which now dictates the overall market's performance.

The KOSPI closed at 7,648.09 on Tuesday, a staggering 7.89% drop from the previous day. This marks a mere 10 trading days since it reached its peak of 9,385.59 on June 18. The index has seen a fluctuation of nearly 2,000 points within the past month. The market experienced three circuit breakers, which temporarily halt trading during sharp declines, within this period. Notably, the KOSPI has triggered 5 circuit breakers this year alone, a significant number compared to historical events like the 9/11 attacks or the COVID-19 pandemic.

This volatility is largely blamed on the "semiconductor mega-cap concentration" phenomenon. Stocks like Samsung Electronics and SK Hynix, along with related companies, constitute 60% of the total market capitalization. Consequently, even minor external news related to the artificial intelligence (AI) industry, which underpins the semiconductor boom, can cause the KOSPI to gyrate wildly. For instance, Meta's announcement of entering the cloud business sent ripples through global markets, raising concerns about overinvestment and a potential slowdown in semiconductor demand, leading to a decline in semiconductor-related stocks.

Further exacerbating the volatility are single-stock leveraged Exchange Traded Funds (ETFs) that track Samsung Electronics and SK Hynix. These ETFs, launched in late May, amplified the swings, with 14 such ETFs falling an average of 27.33% on Tuesday. This situation, coupled with a significant net selling by foreign investors and increased borrowing by retail investors for trading, creates a vicious cycle of selling pressure that further drives down the market.

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The fundamental reason for the amplified adjustment in the domestic stock market due to Meta's news stems from the structure of the supply and demand market.