Bloomberg, a U.S. economic news outlet, ran a column criticizing the Korean stock market, which showed a roller-coaster pattern throughout July, saying "Korea is becoming uninvestable." It noted that despite the positive tailwind of a global artificial intelligence (AI) boom, extreme volatility and clumsy government policy have traumatized investors.
On the 4th (local time), Bloomberg columnist Shuli Ren, in a column titled "South Korea Is Becoming Uninvestable, Too," said "Korea is the hottest and most volatile stock market in the world this year," pointing out that the KOSPI plunged nearly 40% in just 27 trading days. That is on par with China's 2015 market crash.
The columnist first cited the bulls who argue that Samsung Electronics(005930) and SK hynix(000660), which account for more than half of the KOSPI's market capitalization, are direct beneficiaries of the AI infrastructure boom, and that the KOSPI is trading at a 10-year low of 5.5 times on a 12-month forward price-to-earnings ratio (PER), highlighting its undervaluation appeal. However, the columnist drew a line, saying "I do not agree with the simplistic claim."
The column argued that the recent wave of selling and the government's clumsy attempts to prop up the KOSPI traumatized a new class of investors and tarnished the market. It singled out "volatility" as the biggest problem. This year, there were 33 days when the KOSPI moved 5% or more in a single session, far outpacing Japan's Nikkei 225 (4 days) and Hong Kong's Hang Seng Index (0 days). Such extreme volatility serves as a primary reason foreign institutional investors shun the Korean market.
The column identified as the main culprit behind the increased volatility the single-stock leveraged exchange-traded funds (ETFs) that the government approved to introduce at the end of May. According to estimates by Goldman Sachs, when the KOSPI peaked in June, ETF rebalancing flows disrupted the market to the extent that, when SK hynix moved 5%, they accounted for 40% of the stock's average daily trading volume.
The government belatedly moved to restrict individual access to leveraged ETFs. But the column predicted the side effects would persist unless the products themselves are halted. It added that on days of extreme price swings, leveraged products could still account for 17% of SK hynix's trading volume.
Bloomberg pointed to individual investors as the biggest victims of the government's policy failures. It noted they invested on faith in President Lee Jae-myung's stock market reforms, which promised to resolve the so-called "Korea discount" (undervaluation of Korean equities). But while foreigners exited the market, individuals who bought the KOSPI have suffered massive losses. The most popular SK hynix leveraged ETF has plunged 84% from its June peak. As many as 360,000 securities accounts were forcibly liquidated. Notably, 62% of the forced-liquidation accounts were concentrated among those age 35 or younger.
The National Pension Service's inconsistent moves also came under fire. The column said the pension fund abandoned its original role of cooling an overheated market by arbitrarily raising its domestic equity target to avoid selling KOSPI holdings. By not acting in line with past rules, it effectively helped fuel the KOSPI frenzy.
The column went on, "In recent years, global asset managers have deemed China uninvestable due to government policy failures and disregard for investors; unfortunately, similar concerns are emerging about Korea," warning, "It is time for the Korean government to reflect on whether it knows what it is doing and whether young first-time investors are properly protected." It also jabbed, "Even if you believe in the global AI boom, it has become possible to avoid the KOSPI."