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 timing, this round of decline began with disruptions in fundamental expectations and a phase of capital rotation, 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 catalyst for this round of market volatility is the large-scale expansion and concentrated liquidation of leveraged ETFs.

During the previous rapid rise in the stock market, the scale of leveraged ETFs approached $50 billion, accounting for about four times the proportion of the total market capitalization 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 purely 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, and on the other hand, significantly increased the operational difficulty for asset management institutions and brokerages under risk control constraints.

Entering June and July, the global AI hardware sector has weakened, 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 approaching exhaustion.

According to institutional estimates, the scale of leveraged ETFs has rapidly shrunk from about $50 billion to $26 billion, 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, regulatory authorities 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 raised 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 shrink further, 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 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 also amplified the deleveraging pressure.

As stock indices fell and the memory chip sector lagged behind 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 of about 7 times long-short ratio 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 lead to adjustments 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.

Financing by South Korean Residents Is Not a Major Source of Risk

Compared to leveraged ETFs and hedge funds, the contribution of financing by South Korean residents to systemic risk is relatively limited.

Currently, the financing balance of South Korean residents has decreased from over $25 billion to about $21 billion, accounting for about 0.5% of the total market capitalization 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, resident 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 possess 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 residents still includes cash, overseas assets, and previously accumulated stock gains, providing a certain buffer.

Therefore, from a transmission mechanism perspective, resident 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 over 50%, resident 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 put it more firmly, we must have faith: the trend of AI is irreversible, and silicon-based technology is also irreversible.

Almost all technological revolutions in history go through a similar path: first, a certain narrative is established, capital quickly flows in, then due to overcrowding and leverage amplification, it triggers severe volatility, and finally, a true restructuring of chips is completed during the liquidation. Every 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 industrial chain—memory chips. Capital first flows to the most certain places, and it is also easiest to form overcrowding there. When leverage accumulates, 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 is still growing exponentially, large models are still accelerating their iterations, and every segment, 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 now.

Our generation does not lack effort; what we lack is the "entry point" to the dividends of the era. 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. Many people who engaged in industry, went to sea, or traded seized an opportunity that changed their lives.

You may also have 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 trading, but about standing on the technological wave and participating in industrial upgrades through capital. AI is not an opportunity for a single company; 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 barriers to entry are indeed not something ordinary people can participate in by "getting involved personally." However, the capital market precisely provides a pathway—you do not need to become an engineer or an entrepreneur; you just need to understand the trend and participate in it.

What truly matters is not whether you can accurately select every 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 yield results.

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 later participants 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.