The South Korean stock market has experienced a decline for the second day in a row, with the value of Seoul’s equity market plummeting by approximately $2.18 trillion. This downturn has intensified, setting the stage for what could become the most significant monthly decline on record.
The downward trend continued into Wednesday, exacerbating investors’ losses due to a swift market downturn driven by diminished interest in chip manufacturers—once a stronghold propelled by investments in artificial intelligence.
Frank Benzimra, who leads Asia equity strategy at Societe Generale in Hong Kong, commented on the market behavior, indicating that the shares losing value are primarily those featuring the highest leverage. He noted the challenge in predicting when the current selloff might resolve, emphasizing that this is not an area where investors should be focusing at present.
The benchmark KOSPI index saw a staggering drop of up to 12.6 percent before it managed to reduce losses, closing down by 6 percent. This follows a steep decline of nearly 11 percent the previous day, wiping out nearly 40 percent of the index’s value since its peak just a month ago.
In response to concerns raised by lawmakers during a parliamentary session, Finance Minister Koo Yun-cheol expressed regret regarding the introduction of single-stock leveraged exchange-traded funds (ETFs), acknowledging that they had not been adequately analyzed beforehand. He mentioned that the government is actively considering market stabilization measures, which may include stricter regulation of these funds that some analysts blame for exacerbating leveraged trading within the market.
Minister Koo, along with the Bank of Korea governor and financial regulators, convened late Wednesday to address the ongoing crisis. This meeting followed their previous gathering on July 16, where they introduced stricter regulations aimed at tempering the surge in ETF investments.
Following the discussions, the Ministry of Finance announced its intention to impose additional restrictions on single-stock leveraged products. These measures would include individual investment limits—proposed at a maximum of 20 percent of an investor's total holdings—as well as increased trading fees to discourage excessive trading and regulations to avoid simulated trading. They also aim to establish a legal framework for potential emergency measures to stabilize the market.
Jon Withaar, a senior portfolio manager at Pictet Asset Management in Singapore, noted signs of panic and forced selling within the Asian technology sector. He highlighted unusual trading behavior where previously undervalued stocks, including major players like Nintendo and Sony in Japan, experienced significant rallies, adding to the market's turmoil.
Despite the recent crashes, the KOSPI remains up 41.5 percent in US dollar terms year-to-date, solidifying its position as the leading major market performer for the year.
