(July 31): South Korean stocks have become a byword for artificial intelligence-driven (AI) volatility, but this week took the swings to a whole new level.
The benchmark Kospi index surged a record 18% on Friday, with chip heavyweights SK Hynix Inc rallying by the 30% limit and Samsung Electronics Co climbing 27%. That was after the gauge tumbled 17% over the previous three days.
Friday’s rebound was fuelled by a host of positive factors, including bullish reports on the AI buildout overseas and a pledge of regulatory support from the government. The market recovery also benefitted from indications that the liquidation of margin loans and leveraged exchange-traded fund (ETF) bets — which had intensified the previous decline — may have mostly run its course.
The whipsaw week underscores the rapidly shifting sentiment over the global AI boom. The Kospi had tumbled earlier this week despite buoyant earnings reports from Samsung and SK Hynix, as concerns over rising debt levels at the world’s biggest tech firms and a threat of Chinese competition overshadowed the results.
“Today’s rebound looks like a relief rally, but it is supported by improving fundamentals rather than bargain-hunting alone,” said Jung In Yun, chief executive officer at Fibonacci Asset Management Global in Singapore. “After such extreme volatility, we would view this as an early recovery signal.”
Overseas investors led the buying on Friday, snapping up a record 7.2 trillion won (RM20.53 billion) of Kospi stocks on a net basis. That was after they had been steady sellers for much of the year. Retail investors in contrast, once again cut their holdings, offloading a net 8.3 trillion won, an all-time high.
The government this week stepped up measures around more than a dozen leveraged ETFs tracking Samsung and SK Hynix to damp down the market swings amplified by the fund’s rebalancing trades. Introduced in late May to give retail investors local access to leveraged products, the products have been blamed for accelerating the recent downturn.
Even after Friday’s rebound, single-stock leveraged ETFs tied to Samsung are still down almost 50% this month, while those tied to SK Hynix have dropped nearly 70%. The Kospi also ended July lower, losing 22%, its biggest monthly decline since 2008.
The government’s new rules requiring higher deposits for leveraged ETFs also kicked in from Friday, bolstering optimism that the massive volatility may ease. Meanwhile, the authorities said they plan to inject around US$13.9 billion (RM56.79 billion) into the nation’s sovereign wealth fund for strategic investments in AI.
“We believe the deleveraging process in the Korean market is close to its end,” said Kieron Poon, an investment director of Asian equities at Aberdeen Investments. “The market is now waiting to see whether additional restrictions will be imposed on leveraged ETFs, such as higher maintenance margin requirements or limits on the proportion of assets that can be invested in leveraged products.”
Local Korean investors on Friday also drew comfort from SK Group chairman Chey Tae-won’s purchase of 3,620 SK Hynix shares in the open market, his first direct personal investment in the chipmaker. The purchase, which totaled about 4.8 billion won, was interpreted as a vote of confidence in the company’s long-term prospects.
US tech shares rallied on Thursday as expenditure outlooks from firms including Microsoft Corp helped renew enthusiasm for tech hardware stocks. Amazon.com Inc added to the upbeat mood by announcing strong cloud sales and plans to spend more on AI.
A report that Citadel bought a big chunk of the AI stocks held by hedge fund Situational Awareness also bolstered sentiment that the selloff may near its end. Situational Awareness, which owned shares in a number of Asia-based companies including SK Hynix, has been offloading its holdings after suffering losses in the AI rout.
This week’s selloff in the Kospi had pushed down the valuations of Korean stocks to record lows, with the price-to-earnings ratio for the benchmark at 4.7 times, versus nearly 16 times for Taiwan’s key gauge.
At least some in the market predict further gains.
“Given that regulations on single-stock leveraged semiconductor ETFs take effect today and a significant portion of forced liquidations from retail investors has already been cleared out, I believe there’s strong potential for a semiconductor-led rally in the Korean stock market to re-emerge this August,” said Jason Minsang Kam, head of active equity management at Kyobo Life Insurance Co.
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