BY COMFORT OGBONNA
Global investors are regaining confidence in South Korean equities after a turbulent July, with major technology companies drawing renewed interest as investors bet that the long-term growth outlook for the country’s semiconductor industry remains strong.
Foreign investors, who had been net sellers of South Korean stocks throughout the year, returned as buyers during a dramatic market rebound on Friday. Overseas investors purchased about 7.2 trillion won ($5 billion) worth of shares in a single session, more than twice the previous daily record, signaling a shift in sentiment following weeks of heavy selling.
The renewed optimism comes after a sharp market correction that frustrated many domestic retail investors. The benchmark KOSPI index had suffered a significant decline from its June peak, with some leveraged investors experiencing losses of about 40% as volatility intensified.
Analysts say the sell-off was driven more by market positioning and forced liquidations than by deterioration in corporate earnings. Leveraged exchange-traded funds tied to major South Korean chipmakers, including Samsung Electronics and SK Hynix, saw assets fall sharply, declining from about $50 billion in late June to roughly $17 billion by the following week, according to research from J.P. Morgan.
“This was a leverage event, not an earnings event,” said Steve Lawrence, chief investment officer at U.S.-based Balfour Capital Group. He said investors had sold Samsung shares because of their large market weight rather than concerns about the company’s underlying business performance.
Lawrence said the broader semiconductor recovery and artificial intelligence investment cycle remain intact, suggesting that recent market weakness may have created opportunities for investors focused on long-term growth.
The decline in South Korean technology stocks was also intensified by forced selling linked to the collapse of hedge fund Situational Awareness, which reportedly liquidated large equity positions. Market participants said the selling pressure appears to have eased after Citadel acquired much of the fund’s remaining equities portfolio.
Samsung shares fell sharply from their June high before rebounding during Friday’s volatile trading session. The decline occurred despite the company reporting a substantial increase in semiconductor profits and maintaining a positive outlook supported by continued demand from data centers and artificial intelligence-related industries.
Shares of SK Hynix followed a similar pattern, experiencing heavy selling before recovering as investors reassessed the strength of the memory chip market.
Data from market analytics firm EPFR showed that global emerging-market funds had increased their exposure to South Korea over the previous 18 months, although allocations leveled off in June as market volatility increased.
J.P. Morgan analysts said they believe much of the forced unwinding of leveraged positions has already occurred and that hedge funds have largely completed their reduction of exposure. They noted that historical market corrections have often been followed by strong recoveries, with previous emerging-market downturns producing median 12-month gains of around 28%.
Leverage played a major role in both South Korea’s rapid market rise and its sharp decline. The introduction of single-stock leveraged ETFs earlier this year contributed to increased investor participation but also amplified market movements during the downturn.
The KOSPI more than tripled over the 12 months leading up to its June peak, with momentum accelerating after leveraged products linked to individual companies became available. However, those same products increased selling pressure when markets reversed.
Market strategists said many institutional investors remain cautious because of the extreme price swings seen in major Korean technology stocks.
“Long-only investors just don’t want to have to manage positions in stocks that are moving as violently as these stocks are moving,” said William Brattan, head of cash equity research for the Asia-Pacific region at BNP Paribas.
The severity of the decline prompted criticism from investors and policymakers. South Korea’s finance minister issued an apology over the introduction of leveraged single-stock ETFs, saying additional safeguards were needed to manage risks associated with the products.
Retail investors suffered significant losses from leveraged ETF positions, increasing pressure on regulators to review rules governing these investment products.
Analysts said the concentration of retail investment in Samsung and SK Hynix, combined with domestic borrowing and exposure to leveraged foreign funds, created conditions that increased market instability.
Some investors who had positioned for further declines have begun closing those trades. Data from S3 Partners showed average short interest in South Korean equities had fallen to about 4.3%, down from a recent peak of roughly 5.3%.
Despite signs that the worst of the selling pressure may have passed, risks remain. The sharp rebound in the KOSPI on Friday, which saw the index jump 17.9%, was followed by another decline of nearly 5% the following Monday, highlighting continued uncertainty.
Still, some global investors are beginning to reconsider South Korean stocks after the recent correction. Larry Hatheway, head of research at the Franklin Templeton Institute, said U.S. institutional investors that had been hesitant during the decline may now be willing to reassess opportunities in major Korean companies.
For now, investors are closely watching whether the recovery in South Korean equities can continue, with semiconductor demand, artificial intelligence investment and the stabilization of leveraged positions expected to play a key role in determining the market’s next direction.
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