(Bloomberg) — South Korea’s stock market is displaying what would appear to be clear dip‑buying signs: July’s record 33% plunge that has left the benchmark Kospi at its cheapest valuation ever.
That hasn’t been enough for some global investors like Pictet Asset Management, Robeco and Eastspring Investments to step back in. The market’s singularly sharp volatility is proving too much to stomach.
While Korea enjoyed its run as the world’s best‑performing market this year before July’s downturn, investors also have endured nine circuit‑breaker halts, each triggered by Kospi drops of at least 8%.
The funds’ reluctance underscores how volatility — triggered largely by the market’s extreme concentration in Samsung Electronics Co. and SK Hynix Inc., and leveraged exchange-traded funds tied to them — has become Korea’s defining market trait. Overlooked during the boom, it now forces investors to demand bigger safety margins before adding exposure. Valuations and prospects of the two AI‑chip leaders may no longer suffice for funds to justify buying every dip.
“As an institutional investor investing in the global equity market, I think the biggest problem for Korea is volatility is too high,” said Young Jae Lee, senior investment manager at Pictet Asset Management in London. “We can’t just put [money] into a very gambling type of situation.”
In another sign of intensified swings, the Kospi 200 Volatility Index, often called the country’s “fear index,” has surged to 87, more than triple its December level. Global funds have withdrawn a net $12 billion this month, and are rethinking how to handle the fluctuations.
“It has made it more difficult to buy the dip in Korea where you’re seeing interesting levels,” said Ian Samson, multi-asset portfolio manager at Fidelity International. “Just the volatility means that from a portfolio construction perspective, we have to be careful about buying too aggressively.”
Robeco acknowledges Korea’s valuations have come down to attractive levels, but also remains wary of volatility. It’s not buying more Korean stocks for now, though it’s “having a hard look at it,” said Joshua Crabb, head of Asia Pacific equities at the firm in Hong Kong. Robeco is “waiting for it to stabilize a little,” he added.
Pictet’s Lee cites much of the blame on leveraged ETFs. When swings in Samsung and SK Hynix prompt risk teams to demand trimming exposure, managers who did so not only reduced risk but also booked gains. So foreign and institutional investors “may continue to sell unless volatility normalizes,” Lee said.
Heavy use of retail margin loans has added pressure. Loan balances have fluctuated sharply, with the total falling 14% from the peak at the end of last month to 33.2 trillion won ($23 billion) as of July 28.
“The outsized volatility in Korea has been exacerbated by retail leverage, and that’s enough to create investor doubt as to whether the near-term outlook is stable enough for bigger bets,” said John Tsai, portfolio manager at Eastspring Investments in Singapore.
Like the AI trade itself, South Korea’s dimming luster could prove temporary. Backed by strong fundamentals, attractive valuations, and a solid earnings outlook, the market still holds appeal for some investors.
“We are looking to add back, and we’re just trying to do it in a disciplined way,” said Fidelity’s Samson. “The first thing is position sizing, making sure that it’s not so big that you can’t afford short-term volatility.”
The Kospi’s valuations could be another draw, having dropped to record lows as it trades at less than six times 12‑month forward earnings. SK Hynix and Samsung Electronics’ valuations have also fallen below global peers such as TSMC and Micron Technology Inc.
Federated Hermes, though generally underweight in the AI theme, is adding exposure to Korea’s memory sector, according to Jonathan Pines, head of Asia ex-Japan equities. “Our preferred exposure is to Samsung because it is the cheapest large cap AI stock globally,” he noted. “If the AI memory bubble bursts, its cheap price should offer a measure of protection.”
Still, investors are likely to look beyond valuations toward longer‑term measures. Korea has halted new listings of single-stock leveraged ETFs. But calls for more regulatory action will grow louder if swings worsen.
After an emergency meeting Wednesday evening, Korean authorities said the government plans to further limit retail involvement in leveraged ETFs, including capping investors’ exposure at a set share of portfolios.
“Earlier we had overshooting boosted by these leveraged ETFs,” Pictet’s Lee said. “It’s now much cheaper than fundamentals. But I want to see proper stabilization first.”
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