Korean Deleveraging Nearing End, Foreign Investors Returning to Market to Buy the Dip in Samsung and SK Hynix

August 3rd. After the significant correction in the South Korean stock market in July, some foreign institutions believe that the previous sell-off triggered by leveraged trading may be nearing its end. They have started to cover short positions and reallocate their positions in South Korean chip stocks.

Last Friday, the South Korean stock market saw a substantial rebound. Foreign investors ended their continuous net selling trend for the year, with a single-day purchase of approximately 72 trillion Korean won (about $50 billion), setting a record for the largest single-day net purchase in history. At the same time, retail investors in South Korea suffered significant losses as the market fell about 40% from its peak in June.

According to JPMorgan Chase data, the assets under management of leveraged ETFs targeting Samsung Electronics and SK Hynix have dropped from around $50 billion in late June to about $17 billion last week. Analysts believe that the unwinding of leveraged ETFs and deleveraging by hedge funds has largely completed. The sharp decline in the South Korean market was more due to fund liquidation rather than a deterioration of corporate fundamentals.

Steve Lawrence, Chief Investment Officer of Balfour Capital Group, stated that this round of adjustment is a "leverage event" rather than a profitability issue. He believes that Samsung Electronics and SK Hynix still benefit from the recovery of the memory chip cycle and the growth in AI infrastructure investment. The current stock price decline provides an undervalued opportunity.

The JPMorgan Chase analysis team stated that the deleveraging of Korean hedge funds has reached about 90%, returning to a healthier level. Data shows that the average short position in the South Korean market has dropped from a recent peak of about 5.3% to 4.3%.

However, the market risks have not been completely eliminated. The South Korean KOSPI index soared by a record 17.9% last Friday but dropped nearly 5% again on Monday, indicating continued significant market volatility. The South Korean government, criticized for introducing single-stock leveraged ETFs that caused retail investors massive losses, has begun to restrict high-leverage products.