Overseas investment banks: 'Samsung, Hynix leverage factors causing stock market volatility'

International investment banks are pointing to leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK Hynix as significant contributors to the extreme volatility recently seen in the South Korean stock market. These financial products are amplifying short-term price swings, increasing the risk of overheating in both rising and falling markets.

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Leveraged ETFs are likely to amplify short-term volatility without affecting fundamentals, posing a risk of overheating in both upward and downward directions.

JP Morgan Private Bank noted that leveraged ETFs can magnify volatility without affecting underlying fundamentals. Goldman Sachs observed that the sharp decline in the KOSPI index on July 13, which saw Samsung Electronics drop 10.1% and SK Hynix fall 17.0%, was largely driven by forced liquidations of leveraged positions and market sentiment rather than fundamental issues within the semiconductor sector. The concentration of investment in just a few semiconductor stocks, coupled with substantial retail investment in their leveraged products, has made the market more vulnerable and amplified price drops.

Hong Kong-based Futu Securities highlighted the lack of structural buffers in the market, as a significant number of retail investors are using leverage. This has caused market corrections to cascade into mechanical, sharp declines following margin calls and forced liquidations. Bloomberg echoed this sentiment, stating that the recent downturn is less about a reassessment of economic prospects and more about profit-taking and global portfolio rebalancing. The rally's concentration in a few stocks and the use of leverage led to amplified gains, which in turn resulted in larger corrections.

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The sharp decline in the KOSPI index... was largely driven by forced liquidations of leveraged positions and market sentiment rather than fundamental issues within the semiconductor sector.

Extended stock market volatility could negatively impact consumer sentiment and corporate financing conditions. Bloomberg forecasts that continued volatility might make it difficult for the Bank of Korea to implement rapid monetary tightening, such as consecutive rate hikes or a 50 basis point increase. Reuters pointed out that while strong profit growth in Samsung Electronics and SK Hynix supports their stock prices, the concentration in these two companies and the disconnect from the broader real economy leave investors exposed to extreme fluctuations.

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A significant number of retail investors are using leverage, leaving the market without a structural buffer to defend against declines.

In a contrasting view, Citigroup suggested that the decrease in stock valuations due to the KOSPI adjustment might reduce foreign investors' demand for hedging their currency exposure with the Korean won. This could potentially create upward pressure on the won in the foreign exchange market. Foreign investors typically use strategies like selling won futures to hedge against losses from currency fluctuations when investing in Korean assets.

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The recent Korean stock market downturn is attributed more to profit-taking and global portfolio rebalancing than a reassessment of economic prospects.