The most turbulent phase of South Korea's stock market turmoil appears to have subsided following a historic selloff that purged leveraged positions and regulatory measures that curtailed trading in high-risk products.
An index of volatility in Korean shares dropped to a two-month low last week, down from a record high in June. The stabilization was driven by forced liquidations that reduced outstanding margin debt and stricter rules on leveraged exchange-traded funds, which diminished trading and assets in products linked to major chipmakers Samsung Electronics Co. and SK Hynix Inc. Morgan Stanley estimates that the deleveraging process is more than halfway complete. The Kospi Index experienced a nearly 40% drawdown from its June peak, with global funds selling over $100 billion in shares this year, leaving emerging-market funds underweight on the country.
Despite the easing volatility, foreign investors remain cautious. Volatility, although reduced, is still high, prompting investors to weigh attractive valuations and strong earnings prospects against the risk of further market swings. "We are getting constructive, but we’re still not fully comfortable because volatility still remains high," said Isaac Thong, senior investment director and manager of the Aberdeen Asian Income Fund in Singapore.
“We are getting constructive, but we’re still not fully comfortable because volatility still remains high.”
Isaac Thong, senior investment director and manager of the Aberdeen Asian Income Fund
The Kospi's volatility gauge hit a record-high 96.9 in June, up from 28.9 at the end of 2025. The exchange's 20-minute trading halt was triggered four times last month, while the Kospi fluctuated by at least 5% on nearly half of the trading days. The largest one-day move was an 18% jump on July 31. Authorities have implemented measures to curb demand for leveraged products, including higher cash deposit requirements for single-stock leveraged ETFs, leading to a drop in trading volumes and assets for funds tied to Samsung Electronics and SK Hynix.
Retail investors have been significantly impacted, with about 1 trillion won of their accounts facing forced liquidation in June and another 993 billion won in July, the highest months this year. The outstanding balance of margin loans for stock purchases fell to 27.4 trillion won on August 4, the lowest level this year. "This looks like the beginning of a hand-off from domestic retail investors to foreign institutions," said Maxence Visseau, chief investment officer of Arkevium Capital in Dubai.
“This looks like the beginning of a hand-off from domestic retail investors to foreign institutions.”
Maxence Visseau, chief investment officer of Arkevium Capital
Korean stocks are considered cheap by some metrics post-selloff, with the Kospi trading at a record-low 5.1 times its 12-month forward earnings. However, the extreme volatility has made investors cautious. "There’s a clear case that Samsung and Hynix are inexpensive right now — the earnings outlook is still strong — but I think the extreme volatility that you’ve seen is making people more cautious in the near term," said Yiping Liao, a fund manager at Templeton Global Investments in Singapore.
Global funds have slowed their retreat from Korean equities but continue to sell. After a record $30 billion was cashed out in June, overseas investors offloaded another $6.2 billion in July and $4.3 billion so far in August. However, some market participants remain optimistic. Goldman Sachs Group Inc. reiterated its 12-month Kospi target of 12,000, representing an upside of about 90% from Friday’s close.
“There’s a clear case that Samsung and Hynix are inexpensive right now — the earnings outlook is still strong — but I think the extreme volatility that you’ve seen is making people more cautious in the near term.”
Yiping Liao, fund manager at Templeton Global Investments
Background
The recent volatility in South Korea's stock market is a result of a combination of leveraged trading and regulatory changes. Historically, the Kospi has experienced significant fluctuations, but the current measures aim to stabilize the market and restore investor confidence.
Looking ahead, investors will be closely monitoring the market's volatility levels and regulatory developments. While some are optimistic about the market's fundamentals, others remain cautious, awaiting further stabilization before making significant investments.
