From record highs to a sharp fall: South Korea’s market plunged 10%, here's why

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The South Korean stock market went from record highs to a sharp sell-off, with the benchmark Kospi tumbling as low as 10% on Tuesday. The drop came as investors rushed to sell chip stocks over fears of excessive speculation.

Kospi ended the day at 8,203.84, down 910.71 points or 9.99%, after hitting record levels a day earlier. The was led by heavyweight chipmakers Samsung Electronics and SK Hynix, both of which tumbled more than 12%, triggering a 20-minute market-wide trading halt.The fall marked a significant setback for a market that has been among the world's strongest performers this year. The Kospi had surged past the 9,100-point mark for the first time on Monday, powered largely by gains in Samsung Electronics and SK Hynix, which together now account for more than half of the index’s total market capitalisation.The downturn gathered pace as overseas investors offloaded more than 4 trillion won ($2.6 billion) worth of Kospi shares by midday. Retail investors, however, moved in the opposite direction, purchasing stocks as prices fell. Market participants pointed to growing unease over the pace of gains in chip-related shares and the increasing role of leveraged investment products in driving volatility.“Volatility has blown out. (This kind of volatility) cannot be explained without heavy retail engagement,” Alexander Redman, chief equity strategist at CLSA told Reuters.

“What worries me is that retailers are in the driving seat, because they use a lot of margin, though the ratio to market cap is ‌small. What ⁠is more worrying is that regulators have now allowed leveraged single security ETFs, pouring fuel onto the fire.

”South Korean regulators have also recently warned investors about the risks of borrowing to invest after margin debt climbed to a record high in June. The market retreat followed an extraordinary run-up in technology stocks.

SK Hynix had recorded gains for eight straight trading sessions, lifting its year-to-date advance to almost 350% earlier this week and outpacing Samsung Electronics.Despite Tuesday’s decline, the Kospi remains up 94.67% this year. During the same period, the South Korean won has weakened 6.5% against the US dollar. In fixed-income markets, September futures on three-year treasury bonds rose 0.14 point to 103.01.

The yield on the most actively traded three-year Korean treasury bond fell 3.1 basis points to 3.772%, while the benchmark 10-year yield slipped 1.8 basis points to 4.179%.Investors were also monitoring developments in the United States, where expectations for tighter monetary policy have strengthened. Fed funds futures currently imply a 75% chance of a rate increase by September, while BofA Global Research and Deutsche Bank have revised their forecasts and now expect a hike before the end of the year.