The South Korean stock market's astonishing ascent has left financial watchdogs on edge, as the benchmark KOSPI index doubles in value since January, largely driven by semiconductor companies at the forefront of the artificial intelligence supply chain. Key beneficiaries include SK Hynix, now the world's second-largest memory chip manufacturer and a leading producer of high-bandwidth memory (HBM) chips essential for training and running large AI models, and Samsung Electronics, collectively accounting for around half of the KOSPI's total market capitalisation.
Passive investing and retail speculation are feeding off each other in a highly dynamic environment, with these two technology giants at the epicentre. The government's decision to approve leveraged single-stock exchange-traded funds (ETFs) in May has likely exacerbated market volatility, as these products enable investors to gain double the daily exposure to companies like Samsung Electronics and SK Hynix.
The KOSPI's significant price swings have led circuit breakers to be triggered on several occasions, prompting a financial regulator to express regret over the rapid introduction of these ETFs. Retail borrowing has surged in South Korea, with leveraged investment into equities by retail investors reaching a record 60 trillion won (approximately £39 billion) by the end of May.
Daily trading volumes on the KOSPI are now reportedly four times higher than a year ago, reflecting intense investor interest and rapid capital flows. The 'fear of missing out' (FOMO) has been identified as a significant driver of this speculative activity, with the country's finance minister warning about 'excessive herd-like behaviour'.
South Korea's experience serves as a potential warning sign for global markets, where similar dynamics are unfolding. The rapid concentration of ownership in a small number of stocks due to passive and leveraged ETF inflows, combined with high retail leverage, creates a pro-cyclical dynamic that amplifies price movements and poses significant risks to financial stability.
The Bank of Korea has noted the 'increased risk-taking' by investors, while the central bank's explicit warning highlights concerns about market volatility. The potential consequences of this trend are far-reaching, and global markets would do well to take heed of South Korea's experience as they navigate their own AI-driven stock booms.