Leverage frenzy for Samsung, Hynix continues; will government measures curb volatility?

South Korea's financial authorities have introduced measures to dampen demand for single-stock leveraged products, which have been identified as a key driver of stock market volatility. However, analysis of trading data reveals that these products have maintained their popularity among investors over the last week, despite the government's intervention.

Retail investors have shown a persistent appetite for these leveraged products, particularly those based on Samsung Electronics and SK Hynix. Data from the Korea Exchange shows that individual net purchases of the four largest single-stock leveraged products reached 100 billion won in the week of June 20-24. This figure is higher than the total amount purchased since the government announced its measures on June 16.

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The possibility of volatility disappearing in the short term appears low.

The market has experienced extreme volatility, with trading curbs like "sidecars" being triggered on almost every trading day in June. Despite this, the total net assets under management (AUM) for single-stock leveraged products have rebounded. After a dip following the government's announcement, the AUM for 16 such products increased from 8.9 trillion won on June 20 to 10.8 trillion won by June 23.

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Markets that have risen with excessive leverage show larger amplitudes than normal corrections during the deleveraging process.

Analysts suggest that the market's volatility is unlikely to disappear soon, attributing it to excessive leverage. Kim Seok-hwan, a researcher at Mirae Asset Securities, noted that markets driven by excessive leverage tend to experience larger fluctuations during deleveraging phases compared to normal corrections.

In response to concerns that the delayed implementation of measures is diminishing their effectiveness, the government has decided to expedite certain actions. The minimum deposit requirement for these products will be raised from 10 million won to 30 million won starting June 31. Additionally, the minimum trading unit, currently one share, will be increased to 20 shares, a change that will also be implemented earlier than initially planned for November.

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The appropriate total net assets under management for single-stock leveraged products to prevent the 'tail wagging the dog' phenomenon is estimated to be around 5.5 trillion won.