Behind the 100% surge in the South Korean stock market in half a year: foreign capital fleeing 148 trillion Korean won, retail investors leveraging nearly 100 trillion.

In the first half of the year, the South Korean stock market staged a highly watched surge, but the internal structure of this frenzy is causing increasingly deeper concerns. In the first half of this year, the South Korean Composite Index (KOSPI) saw a cumulative increase of 101.14%, ranking first among major global stock indices. However, according to data from Joint Infomax quoted by the Yonhap News Agency, foreign investors sold a net amount of 148.3 trillion Korean won worth of South Korean stocks during the same period, marking the largest net selling scale in history for the same period. At the same time, individual investors bought a net amount of approximately 99.2 trillion Korean won, and institutions bought a net amount of approximately 35 trillion Korean won, with retail investors becoming the main recipients of foreign capital sell-offs. This pattern of "foreign capital fleeing, retail investors taking over" combined with the explosive growth of leveraged ETFs is accumulating systemic risks beneath the calm surface of the market. Goldman Sachs described the trend of KOSPI in their latest report as "a huge, self-reinforcing feedback loop" and warned that the leveraged demand originating from Korea is pushing the entire leverage chain towards its limits. Continued outflows of foreign capital, coupled with re-balancing and exchange rate pressure The large-scale withdrawal of foreign investors is not without signs. The rapid rise of KOSPI itself is considered a direct incentive for foreign selling by the South Korean securities industry. As the weight of South Korean stocks in global investment portfolios significantly increased due to the surge in stock prices, foreign investors faced re-balancing pressure and needed to actively reduce their holdings to maintain their established asset allocation ratios. A Korean investment securities firm stated that the market value of foreign holdings corresponding to the KOSPI index far exceeded the index itself, and their proportion in the overall index has reached its highest level since the financial crisis. They believe that the trend of continued net selling by foreign investors is difficult to reverse until the momentum of KOSPI's rise significantly slows down. The exchange rate factor further intensified the willingness of foreign investors to sell. Since May of this year, the Korean won has been weakening against the US dollar, rising from 1483.3 won to 1549.4 won in just two months, with a cumulative devaluation of about 66.1 won. To avoid exchange rate losses, foreign investors sold a net amount of 92.9 trillion Korean won during this period, accounting for over sixty percent of the total net selling in the first half of the year. A KB Securities researcher warned that the potential sellable holdings by foreign investors are estimated to be "no lower than the amount already sold," and he expects that the strength of the US dollar and the selling of foreign securities will push the Korean won exchange rate further upwards to reach a limit of 1580 won, but he predicts that it may fall back to the range of 1400 won after the fourth quarter. Retail investors taking high leverage and engaging in feedback loops hide vulnerability While foreign investors continue to withdraw, South Korean retail investor's net buying of nearly 100 trillion Korean won has become a major support force in the market, with a significant portion of them using leverage to increase their exposure. In the first half of the year, leveraged ETF products became the most eye-catching stars in the South Korean market. According to data from the Korea Exchange and Joint Infomax, the top 12 ETF products in terms of returns in the first half of the year were all leveraged productsmeaning they track the daily return of the underlying index twice. Among them, the "TIGER 200IT Leveraged" product ranked first with a 764.07% increase, while the "KODEX Semiconductor Leveraged" and "TIGER Semiconductor TOP10 Leveraged" products ranked second and third with 493.80% and 361.23% respectively. The SK Hynix single stock leveraged ETF, which was listed on May 27, also performed outstandingly, ranking in the top seven in terms of returns since its listing. However, the other side of this leveraged feast is the sharply increased market volatility. A researcher from Future Asset Securities pointed out, "As the ETF market expands rapidly, the influence of leveraged ETFs continues to grow, and the structural volatility of the stock market has significantly increased." He also noted, "While leveraged ETFs amplify volatility, the direction of stock prices ultimately still synchronizes with performance, so it is advised to prepare for a shift from concentrated holdings to a more diversified layout." Goldman Sachs warns: The leverage chain is nearing its limit The leveraged behavior of retail investors is not an isolated phenomenon but rather a highly sensitive node in the global leverage system. Robert Quinn, a futures trading expert at Goldman Sachs, warned in the latest edition of the "Goldman Sachs Weekly Brief" that the financing rate for the S&P 500 Index Total Return Futures set to expire in September reached a high last Friday at 127.5 basis points above the federal funds rate. Dealer leverage has reached a historical high since mid-year. Quinn directly attributed this abnormally elevated core drive to Asiaparticularly South Koreaand its almost "endless" demand for leverage. According to a follow-up report by Bloomberg, the explosive growth of leveraged ETF products, the expansion of retail investor margin accounts, and a surge in deposits by hedge funds at major brokerage firms have collectively led to an unusual mid-year spike in market financing costs, which have now reached their highest level since December 2024. Andy Kent from Kyte Securities stated, "Leverage has become one of the most central themes for investors currently, with high credit debt and lending continuing to expand across various parts of the shadow banking system." Goldman Sachs' report also characterizes the trend of KOSPI as "a huge, self-reinforcing feedback loop"where rising stock prices attract more leveraged funds, these leveraged funds further drive up stock prices, creating a cycle. The core concern in the market is: once the financing rate differential becomes unbearable for a particular counterparty, liquidity suddenly tightens, and the entire leverage chain will quickly reverse, posing a risk of a cliff-like decline in asset prices. Institutions raise targets, but risk disparities intensify Despite frequent risk signals, local securities firms in South Korea maintain an optimistic outlook for the second half of the year, primarily based on the continuous improvement in the performance expectations of semiconductor companies. Both Korea Investment Securities and Samsung Securities have raised their upper boundary targets for the second half of KOSPI to 11000 points, with Daishin Securities raising it even further to 11500 points. A researcher at NH Investment Securities stated, "Individual investors have been heavily buying semiconductor ETFs, and the performance momentum of memory semiconductor companies is still ongoing, with relatively low valuation pressure. It is expected that the preference for semiconductor ETFs will continue in the short term." However, Korea Investment Securities also acknowledges that the expected inflow of foreign capital due to the listing of SK Hynix ADRs and the inclusion of Korean government bonds in the WGBI (World Government Bond Index), "Considering the absolute scale and window of inflow time, it is still difficult to offset the continued net selling trend of foreign investors in the domestic stock market." In the midst of high leverage, continued outflows of foreign capital, and exchange rate pressures, this surge dominated by retail and leveraged funds is facing increasingly severe tests as to whether it can continue.