Behind the 100% Surge in South Korea's Stock Market in Half a Year: Foreign Capital Flees 148 Trillion Won, Retail Investors Leverage Up to Absorb Nearly 100 Trillion Won

South Korea's KOSPI soared 101% in the first half of the year, ranking first globally. However, beneath the impressive figures, there are undercurrents. Driven by both rebalancing and exchange - rate pressures, foreign investors made a record net sale of 148 trillion won and fled in a hurry, while retail investors stepped in boldly with nearly 100 trillion won in leveraged funds.

South Korea's stock market staged a spectacular rally in the first half of the year that caught the world's attention. However, the internal structure of this rally is raising deeper and deeper concerns.

In the first half of this year, the cumulative increase of South Korea's Composite Index (KOSPI) reached 101.14%, ranking first among major global stock indices. However, according to Yonhap News Agency citing data from Union Infomax, foreign investors net - sold South Korean stocks worth up to 148.3 trillion won during the same period, setting a record for the largest net - selling volume in the same period in history. Meanwhile, individual investors net - bought about 99.2 trillion won, and institutional investors net - bought about 35 trillion won. Retail investors became the main force to absorb the selling by foreign investors.

This pattern of "foreign investors fleeing and retail investors taking over", combined with the explosive growth of leveraged ETFs, is accumulating systemic risks beneath the calm surface of the market. In its latest report, Goldman Sachs described the trend of KOSPI as "a huge, self - reinforcing feedback loop" and warned that the leverage demand in Asia centered on South Korea is pushing the entire leverage chain to the limit.

Continuous Outflow of Foreign Capital, Driven by Both Rebalancing and Exchange - Rate Pressures

The large - scale withdrawal of foreign investors is not without a trace. The South Korean securities industry generally believes that the rapid rise of KOSPI itself is the direct cause of foreign investors' selling.

As the weight of South Korean stocks in global investment portfolios has significantly increased due to the sharp rise in stock prices, foreign investors are facing rebalancing pressure and need to actively reduce their holdings to maintain the established asset - allocation ratio. Korea Investment & Securities pointed out that "the increase in the market value of foreign - held stocks corresponding to the KOSPI index far exceeds the increase of the index itself, and its proportion in the overall index has risen to the highest level since the financial crisis." It believes that the trend of continuous net selling by foreign investors is difficult to reverse until the upward momentum of KOSPI significantly slows down.

Exchange - rate factors have further increased foreign investors' willingness to sell. Since May this year, the exchange rate of the Korean won against the US dollar has continued to weaken, rising from 1,483.3 won to 1,549.4 won in two months, with a cumulative depreciation of about 66.1 won. To avoid exchange losses, foreign investors net - sold 92.9 trillion won during this period, accounting for more than 60% of the total net - selling volume in the first half of the year.

A researcher at KB Securities warned that the potential sellable stock of foreign investors "is estimated to be no less than the amount already sold so far" and predicted that the strength of the US dollar and the selling of foreign securities in the second half of the year will push the exchange rate of the Korean won further up, with the upper limit possibly reaching 1,580 won, but it is expected to fall back to the range of 1,400 won after the fourth quarter.

Retail Investors Take Over with High Leverage, and the Feedback Loop Hides Fragility

While foreign investors are continuously withdrawing, South Korean retail investors have become the main supporting force in the market with a net - buying volume of nearly 100 trillion won, and a considerable part of it has magnified their exposure through leverage tools.

In the first half of this year, leveraged ETF products became the most shining stars in the South Korean market. According to data from the Korea Exchange and Union Infomax, the top 12 ETFs in terms of yield in the first half of the year were all leveraged products - products that track twice the daily yield of the underlying index. Among them, "TIGER 200IT Leverage" led the list with a 764.07% increase, and "KODEX Semiconductor Leverage" and "TIGER Semiconductor TOP10 Leverage" ranked second and third with 493.80% and 361.23% respectively.

The single - stock leveraged ETF of SK Hynix, which was listed on May 27, also performed brilliantly after its listing. It has occupied the top seven positions in the list of increases since its listing.

However, the other side of this leverage feast is the sharply magnified market volatility. A researcher at Mirae Asset Securities pointed out that "as the domestic and foreign ETF markets expand rapidly, the influence of leveraged ETFs continues to increase, and the volatility of the stock market has significantly increased structurally." He also reminded that "although leveraged ETFs magnify the volatility, the stock - price direction will ultimately be in sync with the performance. Currently, one should prepare to shift from concentrated positions to a more diversified layout."

Goldman Sachs Warns: The Leverage Chain is Approaching the Limit

The leveraged behavior of retail investors is not an isolated phenomenon but a highly sensitive node in the global leverage system.

Robert Quinn, an expert in futures trading at Goldman Sachs, warned in the latest issue of "Goldman Sachs Weekly Brief" that the financing rate of the S&P 500 Total Return Futures (SPX TRF) expiring in September reached a maximum of 127.5 basis points above the federal funds rate last Friday, and the dealer leverage has risen to a mid - year historical high. Quinn directly pointed the core driving force of this abnormal increase to Asia - especially South Korea - the almost "endless" demand for leverage.

According to a follow - up report by Bloomberg, the explosive growth of leveraged ETF products, the expansion of retail investors' margin accounts, and the sharp increase in the deposits of hedge funds at prime brokers have jointly pushed the market financing cost to an unusual mid - year jump, reaching the highest level since December 2024. Andy Kent of Kyte Brokerage said, "Leverage has become one of the most core themes for investors at present. The margin debt is high, and the borrowing in all links of the shadow banking system continues to expand."

The Goldman Sachs report also characterized the trend of KOSPI as "a huge, self - reinforcing feedback loop" - rising stock prices attract more leveraged funds to enter the market, and leveraged funds further drive up stock prices, and so on. The core concern of the market is that once the dealer financing spread becomes unbearable for a certain counterparty and the liquidity suddenly tightens, the entire leverage chain will quickly reverse, and asset prices will face the risk of a cliff - like decline.

Institutions Raise Targets, but the Disagreement on Risks Intensifies

Despite the frequent risk signals, South Korean domestic brokerages still hold an optimistic attitude towards the market in the second half of the year, mainly based on the continuous improvement of the performance expectations of semiconductor companies.

Both Korea Investment & Securities and Samsung Securities have raised the upper - limit target of KOSPI for the second half of the year to 11,000 points, and Dae Shin Securities has raised it to 11,500 points. A researcher at NH Investment & Securities said, "Individual investors are concentrated on buying semiconductor ETFs, and the performance momentum of memory semiconductor companies is still continuing, and the valuation pressure is relatively low. It is expected that the preference for semiconductor ETFs will continue in the short term."

However, Korea Investment & Securities also admitted that the expected inflow of foreign capital brought about by the listing of SK Hynix ADR (American Depositary Receipt) and the inclusion of South Korean government bonds in the WGBI (World Government Bond Index) "is still difficult to offset the continuous net - selling trend of foreign investors in the domestic stock market considering the absolute scale and the inflow time window."

Against the backdrop of high leverage, continuous outflow of foreign capital, and exchange - rate pressure, whether this rally led by retail investors and leveraged funds can continue is facing increasingly severe tests.

This article is from "Wall Street News", author: Zhao Ying. It is published by 36Kr with authorization.