The most extreme phase of South Korea’s stock-market turmoil may be over after a historic selloff flushed out leveraged positions and regulatory curbs sent trading in some of the riskiest products plunging.
An index of volatility in Korean shares fell to a two-month low last week, from a record high in June. The stabilization followed forced liquidations that helped reduce outstanding margin debt, while tighter rules on leveraged exchange-traded funds also cut trading and assets in products tied to chip giants Samsung Electronics Co. and SK Hynix Inc.
The moves suggest that some of the leverage-driven excess that amplified the extraordinary swings in local equities has now been cleared, with Morgan Stanley estimating the deleveraging process is more than half over. The Kospi Index saw a drawdown of almost 40% from its June high, while global funds have sold more than $100 billion of shares this year, leaving emerging-market funds underweight on the country.
Still, overseas money managers aren’t rushing back in. Volatility remains elevated even after its decline, leaving investors to weigh historically cheap valuations and a strong earnings outlook against the risk of further sharp swings.
“We are getting constructive, but we’re still not fully comfortable because volatility still remains high,” said Isaac Thong, senior investment director and manager of the Aberdeen Asian Income Fund in Singapore. “If that potential expected return is high enough to justify the volatility, then things get more constructive. So we are getting toward that level.”
Surging turbulence in the Kospi drove a volatility gauge to a record-high 96.9 in June, up from 28.9 at the end of 2025. The exchange’s 20-minute trading halt — triggered when the market falls by 8% — was activated a record four times last month, while the Kospi rose or fell by at least 5% on nearly half of the trading days. The largest one-day move was a record 18% jump on July 31.
The authorities took a number of steps in response to the whipsaw trading, vowing further measures to curb demand for leveraged products. A higher cash deposit requirement for single-stock leveraged ETFs began July 31, leading to a drop in trading volumes and assets for funds tied to Samsung Electronics and SK Hynix.
The stock slump and tighter regulations flushed out many retail investors, who had been lured in by the market’s rally. About 1 trillion won of their accounts faced forced liquidation in June, and another 993 billion won in July, the two highest months this year, according to data from the Korea Financial Investment Association. The outstanding balance of margin loans used to finance stock purchases slid to 27.4 trillion won on Aug. 4, the lowest level this year.
“This looks like the beginning of a hand-off from domestic retail investors to foreign institutions,” said Maxence Visseau, chief investment officer of Arkevium Capital in Dubai. Still, “a few calmer trading days will not be enough. Foreign portfolio managers need evidence that the market’s price-discovery mechanism is functioning normally again,” he said.
Korean stocks look cheap by some measures after the selloff — with the Kospi trading at a record-low 5.1 times its 12-month forward earnings — but that still isn’t enticing money managers to rush back in.
“There’s a clear case that Samsung and Hynix are inexpensive right now — the earnings outlook is still strong — but I think the extreme volatility that you’ve seen is making people more cautious in the near term,” said Yiping Liao, a fund manager at Templeton Global Investments in Singapore.
“Because of this huge volatility that you’ve seen, you’re not seeing this very aggressive add back — it’s more of a drip-drip type of action,” she said.
Global funds have slowed their retreat from Korean equities but they are still selling. After cashing out a record $30 billion in June, overseas investors offloaded another $6.2 billion in July and $4.3 billion so far in August, according to stock exchange data.
Still, at least some market participants are bullish.
Goldman Sachs Group Inc. this week reiterated its 12-month Kospi target of 12,000, representing an upside of about 90% from Friday’s close.
If you just get the volatility to decline then “our view is the underlying fundamentals will reassert themselves, and we think they are very attractive,” the investment bank’s chief Asia Pacific equity strategist Timothy Moe said in an interview last week on Bloomberg Television.
Others are staying on the sidelines.
“Our view is fundamentals are very sound, the results recently show that but the leverage in the market and the positioning really got a bit too hot so we are taking a pause,” said Sean Taylor, chief investment officer and portfolio manager at Matthews International Capital Management. “Maybe we have another month of pause.”
With assistance from Abhishek Vishnoi.
This article was generated from an automated news agency feed without modifications to text.
