South Korea is becoming uninvestable, too

Shuli Ren, Bloomberg

South Korea is home to the world’s hottest — and most volatile — stock market this year. The Kospi’s near 40% tumble in just 27 trading days is comparable to China’s market crash in 2015. But with the global AI stock rout easing, investors are asking whether the benchmark index is due for a rebound.

Bulls argue that, unlike China a decade ago, South Korea’s business fundamentals remain solid. Samsung Electronics Co. and SK Hynix Inc., which account for more than half the index, are direct beneficiaries of the AI infrastructure boom. The Kospi also looks cheap, trading at a decade-low 5.5 times forward earnings.

I disagree. Before predicting a rebound, we should ask whether the recent selloff — and the government’s clumsy attempts to support the market — have permanently damaged investor confidence. It’s entirely possible to believe in the AI-driven industrial boom while staying far away from the Kospi.

Volatility is the biggest problem. This year, the Kospi has recorded 33 trading days with moves of at least 5%, compared with four for Japan’s Nikkei 225 and none for Hong Kong’s Hang Seng. Such swings deter foreign institutional investors, who have been net sellers throughout 2026. For professional fund managers, risk-adjusted returns matter as much as diversification, making larger allocations difficult if the Kospi continues to whipsaw.

Much of the instability stems from leveraged exchange-traded funds after the government approved single-stock leveraged ETFs in late May. These products require daily rebalancing, forcing managers to buy into rallies and sell during declines, amplifying market moves. At the Kospi’s June peak, a 5% move in SK Hynix could trigger rebalancing equal to 40% of the stock’s average daily trading volume, according to Goldman Sachs Group Inc.

Recognising the damage, the government plans to restrict retail access to these products but has stopped short of eliminating them. Goldman estimates leveraged ETFs could still account for 17% of SK Hynix trading during periods of extreme volatility.

More worrying is the impact on retail investors, many of whom embraced President Lee Jae Myung’s stock-market reform agenda after years of avoiding the market because of the so-called Korean discount.

Now many face devastating losses. The most popular leveraged SK Hynix ETF has fallen as much as 84% from its June peak. Around 360,000 brokerage accounts were forcibly liquidated, with 62% belonging to investors under 35. Seoul effectively encouraged inexperienced traders to take excessive risks just as the global AI boom approached its peak.

The experience may reinforce the long-held perception that the Korean market is a value trap. Unlike Chinese investors, who face strict capital controls, Koreans can invest freely overseas. Many have long preferred the Nasdaq. After this episode, they may simply leave the Kospi behind.

The approval of single-stock leveraged ETFs was not the government’s only mistake. Earlier this year, the $1 trillion National Pension Service relaxed its own allocation rules to avoid selling domestic equities. That undermined the pension fund’s traditional stabilising role of buying during downturns and trimming positions during rallies. By abandoning its previous discipline, the NPS helped fuel the market frenzy.

For years, global asset managers have argued that China is becoming uninvestable because of policy mistakes and weak regard for investors. Similar concerns are now emerging in South Korea. Investors are asking whether Seoul understands the consequences of its policies and whether first-time traders are adequately protected. The government has some serious self-reflection to do. [Abridged]

Courtesy Bloomberg/Shuli Ren