Forced Deleveraging Hits South Korean Stocks Despite Record Chip Profits

South Korea’s KOSPI index has entered a period of extreme volatility, erasing a significant portion of its AI-fueled gains. After soaring +71.87% over the past year, the benchmark index has plummeted -34% in the last month alone, a downturn driven by the unwinding of speculative leverage rather than a deterioration in corporate fundamentals.

The Great Unwinding

The KOSPI's sharp reversal highlights its heavy concentration in the semiconductor sector. Tech giants Samsung Electronics and SK Hynix collectively account for more than 50% of the index's total weight, making the broader market exceptionally sensitive to their performance.

The sell-off has occurred despite a record-breaking earnings season. SK Hynix recently reported the best quarterly results in Korean corporate history, with a 76% operating margin, yet its shares fell sharply on the news. This dynamic suggests that markets, having priced in perfection, are now punishing anything short of a significant positive surprise.

Leverage and Regulation

The primary catalyst for the market's decline appears to be a forced deleveraging of speculative retail positions. According to the source material, Korean retail investors held ₩34.37 trillion (approx. $23 billion) in margin loans as of mid-July. This was amplified by the explosive growth of products like a Hong Kong-listed 2x leveraged ETF on SK Hynix, which grew 20-fold to $7.78 billion in assets in 2026.

Ad

In response, Seoul's finance ministry announced new rules to curb this speculation, effective August 5, 2026. The measures include caps on single-stock leveraged ETFs and a tripling of the minimum cash balance required to trade them to ₩30 million. This regulatory action is forcing investors to liquidate positions, adding significant selling pressure to the market.

Fundamentals Remain Strong

Beneath the market turmoil, the fundamental outlook for Korea's key industries remains robust. Analysts note that Samsung and SK Hynix are now trading at price-to-earnings ratios below 5x, an unusually low valuation for companies with sold-out order books through 2026.

Looking ahead, the supply-demand picture for AI memory chips appears bullish. Meritz Securities analyst Kim Sunwoo warned that suppliers are only meeting 75-80% of current demand, with SK Hynix's CEO forecasting a potential "worst supply shortage in global memory industry history" by 2027. This is supported by strong macroeconomic data, including a +3.7% year-over-year GDP growth in Q2 2026, which beat forecasts.