CEO Ha Chang-bong: "Foreign investors are changing strategy, not leaving the Korean market; regulating single-stock leveraged products is easing market overheating"

It carries important implications for the overall flow of the Korean stock market and for investment strategy.

"For foreign investors, I think there's no market as attractive as the Korean stock market. Shall I tell you why? The US has no upper or lower limits. For our foreign investors and hedge funds, it's a market structure where taking profits is very easy." He added that this structural feature has a large effect on the inflow and outflow of foreign capital.

In May 2023, single-stock leveraged products were first launched in the Korean stock market. These products pursue twice the return of Samsung Electronics and SK Hynix as underlying assets, so a decline can produce twice the loss. Ha said that in June, the trading volume of these products surged to exceed total KOSDAQ trading value, which caused a major backlash when Samsung Electronics and SK Hynix shares plunged. He said, "Korea's stock market launched single-stock leveraged products in May this year. This is a system that has never existed before in our stock market history. They created two-times products with two underlying stocks, Samsung Electronics and SK Hynix, didn't they?" He stressed the impact these products had on the market.

Ha said that in May and June, foreign investors sold more than 50 trillion won per month, the largest monthly amount in Korean stock market history. However, in July and August the selling appeared to stop. He said it remains to be seen whether this is because foreigners had sold enough or because they have no more shares left to sell. "May and June were the months when the most money was sold in our stock market's history on a monthly basis, over 50 trillion won. Whether that's because they sold a lot or because foreign investors have nothing left to sell is a question for later, but it can be said that the selling has somewhat stopped in July and August." This trend suggests the possibility that foreign investors are changing their Korean market strategy.

Ha described the foreign ownership ratios of Korea's top market-cap companies. Samsung Electronics and SK Hynix have fallen below 50% foreign ownership, while financial stocks such as KB Financial and Shinhan still maintain above 50%. He said, "Based on market capitalization in Korea, after No. 1 Samsung Electronics and SK Hynix come Hyundai Motor, LG Energy Solution, and Samsung Electro-Mechanics. Foreign ownership ratio is the percentage of total shares held by foreigners. Right now Samsung Electronics and SK Hynix have fallen below 50%. But financial stocks like KB Financial and Shinhan still exceed 50%." He pointed to differences in foreign investment preference across industries.

Ha stressed that risk management is the top priority in managing large amounts of assets. He explained that managing 10 billion won and earning just 10% a year yields 1 billion won in profit, and if 10% of that is taken as incentive, the annual gain is 100 million won. He said, "If you manage 10 billion won, even a 10% annual return produces 10 billion won in profit. Even if you take a 10% incentive from that 10 billion won profit, that's 1 billion won a year. When the money gets bigger, the first position you need is risk management." He argued that risk management becomes more important as the amount grows.

Ha explained that the main reason foreign investors reduced their Samsung Electronics and SK Hynix holdings was that these stocks' prices had risen too much. The analysis is that this was not deliberate selling but a natural adjustment of weightings as prices rose more than expected. He said, "Because the share prices rose so much, the weighting became disproportionate, so we reduced it. And that process of reducing the weighting has continued through August..." He added that this reduction process continued until August.

He said the market size of single-stock leveraged products investing only in Samsung Electronics and SK Hynix reached 20 trillion won in June. By comparison, the US has more than 400 single-stock leveraged products, yet their total market capitalization was about 50 trillion won. He emphasized the overheating of specific-stock leveraged products in the Korean market.

Ha predicted that foreign investors will not completely abandon the Korean market. He explained that at the center of the US-China rivalry is AI, and that the core component making up all of AI is memory semiconductors. He stressed that Korea holds Samsung Electronics and SK Hynix, the world's top memory chip makers, giving it the world's best competitiveness in this field. "At the center of the US-China rivalry is AI, right? And the thing that can make up all of AI is memory semiconductors. As you know, one of the things Korea does best in the world is make memory semiconductors. Samsung Electronics and SK Hynix are the world's No. 1 companies." He analyzed that this distinctive Korean semiconductor technology will keep drawing sustained interest from foreign investors.

Ha explained the phenomenon of margin-loan balances dropping by more than 10 trillion won in a single month. He interpreted this not simply as retail investors fleeing out of fear, but as overheated "debt-financed investing" returning to normal levels. He added that the sharp drop in margin-loan balances can be seen as a positive signal that cools market overheating and restores soundness.

He noted that customer deposits stood at 97.9 trillion won as of August 11, and stressed that inflows from retail investors played an important role in defending the market against declines.

Ha recalled situations in which Samsung Electronics fell from the 350,000-won range to the low 200,000-won range, and SK Hynix from the 3-million-won range to below 1.5 million won. He explained that these sharp declines forced many investors into forced liquidation, and as prices kept falling many kept buying more, exhausting their funds. He pointed to the "terrible market" in July and the market falling for nine and then eight consecutive weeks, and added that investors had reached a state of having no ammunition left.

He added that institutional investors' money is ultimately retail investors' money too, so if individuals have no funds, institutions will also struggle for capital.

Ha said the regulation of single-stock leveraged products has had a real effect. Although the market fell sharply in July, the single-stock leveraged amount, which had been over 10 trillion won across 16 stocks before final trading, plunged to under 1 trillion won in August. Some have evaluated that, as the single-stock leveraged market shrank sharply, the KOSDAQ rebounded more than 30% in just two weeks, from around 650 points to the mid-to-high 800s.

"Wag the Dog" refers to a situation in which the tail (the derivatives market) shakes the body (the stock market). Just as a dog wags its tail when its owner comes home and the body follows, movements in the derivatives market move share prices regardless of the stocks' underlying value. Ha stressed that after single-stock leveraged products were regulated, this phenomenon was most pronounced in SK Hynix, which had the highest trading volume.

Ha said financial authorities are working out regulations on leveraged products. They are reviewing options such as raising the purchase unit for these products from one share to 20 shares, and extending training time for new investors. Currently one hour of training at the Financial Investment Education Institute is required, but the plan is to make at least five hours of mock investing and mock trading mandatory. Ha added his personal view that the "amount issue" matters more than training time.

He suggested that some may have flowed into Samsung Electronics and SK Hynix common shares, and that exhausted investors may have withdrawn funds and moved them into deposits. Some expect the KOSDAQ to reach 1,200 or even 3,000 points after the regulation, but Ha took a cautious stance, saying, "I think we need to watch until there is data."

Just as a dead cat bounces briefly when dropped from a wall, it describes a short rebound in shares that have fallen sharply. Ha explained that the word "dead" implies a temporary rebound that tends to return to the starting point, and that it differs from a genuine trend reversal. He added, "That means it goes back to where it started."

Using Samsung Electronics and SK Hynix as examples, he explained that if Samsung fell from its 350,000-won peak to the low 200,000s, that is a drop of about 120,000 won, and only once it recovers at least half of that, to around 300,000 won, can a possible trend reversal be discussed.

He added that these price levels correspond to roughly 7,700 to 8,000 points on the overall stock index. As an investment strategy, he advised that if Samsung is at 230,000 to 240,000 won and SK Hynix at 1.5 to 1.6 million won, it is right to buy and hold. If Samsung is in the late 200,000s to early 300,000s and SK Hynix in the late 1.8 to 1.9 million range, he advised holding rather than selling, cautioning against hastily judging it as a technical rebound.