The storm point of the global stock market: The deleveraging of the South Korean stock market has basically been completed

Author of this article | Godzilla Data support | Pythagorean Big Data

Recently, the South Korean market has experienced significant volatility, with the KOSPI index having a maximum drawdown of 32% since its peak of 9385.6 points on June 19.

As the "eye of the storm" in this round of the global AI market, the adjustment in the South Korean market has become an important trigger for the fluctuations in global technology stocks, which have generally adjusted.

In terms of rhythm, this round of decline began with disturbances in fundamental expectations and phase rotations of funds, but the core variable that truly amplified the decline is the highly concentrated leveraged funding structure in the South Korean market.

It is noteworthy that from the current point of view, the fundamentals of the South Korean market have not undergone fundamental changes, while the passive deleveraging process driven by leverage has entered its final stage.

Deleveraging of Leveraged ETFs at 75%

The core trigger of this market volatility is the large-scale expansion and concentrated liquidation of leveraged ETFs.

During the previous rapid rise of the stock market, the scale of leveraged ETFs once approached $50 billion, accounting for about four times the proportion of the total market value of the South Korean stock market compared to the U.S. market, significantly amplifying the market's endogenous volatility.

This high-leverage structure means that price fluctuations are no longer solely driven by fundamentals but are more dominated by position structures.

High volatility has, on one hand, suppressed the entry of long-term funds sensitive to volatility, while on the other hand, it has significantly increased the operational difficulty for asset management institutions and brokerages under risk control constraints.

Entering June and July, the global AI hardware sector weakened in phases, combined with the "daily rebalancing" mechanism of leveraged ETFs, which is characterized by: passive accumulation during rises and concentrated liquidation during declines. Once leading stocks experience a pullback, it easily triggers a negative feedback loop of "stock price decline → margin call → forced liquidation → further stock price decline."

In late June, several leveraged ETFs saw daily declines exceeding 25%, triggering the market's circuit breaker mechanism, with the volatility index VKOSPI soaring to five times the U.S. VIX index, and market liquidity nearing exhaustion.

According to institutional estimates, the scale of leveraged ETFs has rapidly shrunk from about $50 billion to $26 billion, with a cumulative reduction of about $24 billion. Based on an estimated reasonable stock of about $18 billion, the current deleveraging progress has reached about 75%, with about 25% remaining adjustment space, significantly converging.

At the same time, regulators have begun to constrain leveraged expansion from an institutional level.

Starting in August, strict new regulations will be implemented: From August 5, the issuance of all new single-stock leveraged ETF products will be suspended, the minimum cash trading threshold will be raised from 10 million won to 30 million won, and from August 19, only cash can be used as initial margin; starting in November, the minimum trading unit for single-stock leveraged ETFs will be increased from 1 lot to 20 lots.

As policies gradually take effect, new channels for high-leverage funds to enter the market have been effectively blocked, and the scale of leveraged ETFs is expected to further shrink, reducing the systemic risk of amplified volatility from the source.

Hedge Funds Deleveraging Over 50%

In addition to leveraged ETFs, the high-leverage configuration of hedge funds is also an important amplifier of this round of volatility.

Since April of this year, global equity and macro hedge funds have significantly increased their allocation to the South Korean market, amplifying their stock exposure through swap transactions (Total Return Swap) provided by brokerages. During the upward phase of the market, this structure significantly enhanced market elasticity; however, during the pullback process, it simultaneously amplified the deleveraging pressure.

As the stock index fell and the memory chip sector underperformed the market, the issue of tight swap quotas has noticeably eased.

Institutional estimates show that the long-short position ratio has fallen from a peak of about 5.5 times to below 4 times; if we reference the extreme period's long-short ratio of about 7 times and the corresponding 6 times net long position, the current net long level of about 3 times indicates that leverage has decreased by over 50%.

At the same time, as stock price declines led to a reduction in MSCI index weights, the forced selling pressure from passive index funds has basically been released, and the liquidity squeeze risk on the institutional side has significantly eased.

Overall, the "passive deleveraging" process at the hedge fund level has completed its most intense phase.

South Korean Household Financing Is Not a Major Source of Risk

Compared to leveraged ETFs and hedge funds, South Korean household financing contributes relatively limited systemic risk.

Currently, the balance of household financing in South Korea has decreased from over $25 billion to about $21 billion, accounting for about 0.5% of the total market value of the South Korean stock market. This level is not only lower than the U.S. market's approximately 1.9% but also significantly lower than the A-share market's approximately 2.8% financing ratio.

Structurally, household financing is more concentrated in the KOSDAQ market, which has a higher proportion of small and medium-sized stocks, thus having a relatively limited direct impact on the core weighted stocks of the KOSPI.

More critically, ordinary financing accounts do not have the "mechanical rebalancing" mechanism similar to leveraged ETFs. During stock price declines, investors do not need to passively and quickly reduce their positions, making it difficult to form a chain reaction of selling.

Additionally, the asset structure of South Korean households still includes cash, overseas assets, and previously accumulated stock gains, providing them with a certain buffer.

Therefore, from a transmission mechanism perspective, household financing is unlikely to become the core variable triggering systemic risk, nor is there a realistic basis for large-scale chain liquidations.

In summary, the deleveraging process in the South Korean market can be clearly summarized as follows: leveraged ETFs have deleveraged by about 75%, hedge funds have deleveraged by over 50%, household financing risks are controllable, and the passive selling pressure from foreign capital has basically been released.

Compared to the early stages of the decline, the high-leverage structure that is most likely to trigger "chain selling" has completed most of its liquidation. The market is gradually transitioning from a "liquidity-driven decline" to a "fundamentals-driven pricing."

In this context, as long as there is no trend reversal in the fundamentals, this round of adjustment is closer to a concentrated liquidation of crowded trades rather than the end of the AI market.

Conclusion

To be a bit longer, we must firmly believe: the trend of AI is irreversible, silicon-based is irreversible.

Almost all technological revolutions in history go through a similar path: first, a certain narrative is established, funds quickly flow in, then due to overcrowding and leverage amplification, severe volatility is triggered, and finally, a true reconstruction of chips is completed in the liquidation. Each decline, on the surface, is a price pullback, but essentially it is an optimization of structure.

This time is no exception.

The reason the South Korean market has become the eye of the storm is not because it is weaker; on the contrary, it is because it stands at the core of the AI industry chain—memory chips. Funds first flow to the most certain places, and it is easiest to form overcrowding there. When leverage is added to the trend, volatility is no longer a risk but a necessity.

But now, the most dangerous phase is passing.

What we truly need to think about is not the short-term ups and downs, but: is this track still viable?

If the answer is yes, then volatility is a cost, not a risk.

The major trend of AI has not changed due to this round of adjustment. The demand for computing power continues to grow exponentially, large models are accelerating iteration, and every link, including data centers, optical communication, and advanced packaging, is expanding. This is not an industrial path that can be easily falsified, but a productivity revolution that is unfolding.

It can even be said—there is no turning back.

Our generation does not lack effort; what we lack is the "entrance" to the era's dividends. Many people looking back at their parents' generation often feel a complex emotion: during the reform and opening up, it seemed that there were opportunities everywhere, whether in manufacturing, going to sea, or trade, many seized a chance and changed their lives.

You may have also asked: why could they, and why can't we?

But the problem is that the opportunities for each generation take different forms.

Today's opportunities are no longer about opening factories or doing trade, but about standing on the technological wave and participating in industrial upgrades through capital. AI is not an opportunity for a single company; rather, it is the entire era's dividend mechanism that is being restructured.

Chips, large models, computing networks, optical modules—these fields that sound complex and have high thresholds are indeed not areas where ordinary people can participate by "getting involved personally." However, the capital market precisely provides a path—you do not need to become an engineer or an entrepreneur; you only need to understand the trend and participate in it.

What truly matters is not whether you can accurately select each target, but whether you are standing in the right direction.

If the direction is right, volatility is just a process; if the direction is wrong, no amount of effort will be anything but consumption.

So back to the core question—

If AI ultimately proves to be wrong, then our generation may have truly lost the most important opportunity; but if it is right, then every adjustment now is an opportunity for those who come later to get back on board.

The market will not stop because of your hesitation, and the era will not slow down because of your uncertainty.

The only decision you need to make is whether to get on board.