South Korea's "Epic Bull Market" Reaches Turning Point? AI Leveraged Trading Drives Stock Market Away from Fundamentals, Regulatory Agency Takes Action

BlockBeats News, July 20th. Recently, the South Korean stock market has experienced increased volatility. Market insiders have issued warnings that the movement of the Korea Composite Stock Price Index (KOSPI) is gradually deviating from the fundamental basis. Regulatory bodies have started to take actions to restrict high-risk trading activities amid the AI investment craze, chip stock surge, and leverage-driven funds.

Reports indicate that since 2026, the South Korean stock market has frequently triggered circuit breakers, with more than half of KOSPI's historical circuit breaker incidents occurring in the first six months of this year. Alexander Redman, Chief Equity Strategist at Lyon Securities, stated that the KOSPI movement has decoupled from traditional economic indicators and corporate profit expectations, currently being mainly influenced by single-stock leveraged ETF capital flows.

The South Korean market previously benefited from the AI industry cycle, with semiconductor companies such as Samsung Electronics and SK Hynix becoming the core drivers of the uptrend, collectively accounting for over half of the KOSPI index weight. However, as leveraged funds concentrated into the market, the volatility significantly increased.

Data shows that the scale of retail investors' margin loans in South Korea recently reached approximately 34.37 trillion Korean won (about $230 billion), close to the historical high of 38.6 trillion Korean won set in June. In addition, some leveraged ETFs tracking SK Hynix have surged more than 20 times since the beginning of this year, with a total size of $7.78 billion. The rebalancing of these funds may further amplify market fluctuations.

Facing the rising market risk, the Financial Services Commission of South Korea (FSC) announced on July 16th the temporary suspension of new single-stock leveraged ETF listing applications. Moreover, starting from August 5th, the minimum cash deposit requirement for investing in domestic and foreign single-stock leverage products will be raised from 10 million Korean won to 30 million Korean won, along with tightened prepayment recognition rules.

Some institutions believe that regulatory measures will help the market return to its fundamentals. Mike Sell, Head of Global Emerging Market Equities at Alquity, expressed that the recent unusual fluctuations in the South Korean stock market would be welcomed by long-term investors through any measures that promote the market's refocusing on corporate fundamentals.

However, Mike Shao, Chief Investment Officer for Asia Pacific at Schroders, believes that the rise in the South Korean stock market still has fundamental support. The semiconductor cycle recovery, AI supply chain demand growth, and export improvements will continue to drive the South Korean economy and corporate earnings. It is expected that the AI-driven chip cycle will remain a structural growth driver in the second half of 2026.