South Korea’s stock market volatility has eased as leveraged trades unwind amid regulatory curbs, with an index of volatility in South Korean shares recently falling to a two-month low. The stabilisation followed forced liquidations that helped reduce outstanding margin debt, while tighter rules on leveraged exchange-traded funds also cut trading and assets in products tied to chip giants Samsung Electronics and SK Hynix.
The Kospi Index saw a drawdown of almost 40 per cent from its June high, while global funds have sold more than US$100 billion of shares in 2026, leaving emerging-market funds underweight on the country.
The authorities took a number of steps in response to the whipsaw trading, vowing further measures to curb demand for leveraged products. A higher cash deposit requirement for single-stock leveraged ETFs began on July 31, leading to a drop in trading volumes and assets for funds tied to Samsung Electronics and SK Hynix.
About 1 trillion won of retail investors’ accounts faced forced liquidation in June, and another 993 billion won in July, the two highest months in 2026, according to data from the Korea Financial Investment Association.
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Overseas money managers are not rushing back in, despite historically cheap valuations and a strong earnings outlook. Isaac Thong, senior investment director and manager of the Aberdeen Asian Income Fund in Singapore, said: “We are getting constructive, but we’re still not fully comfortable because volatility still remains high.”
Maxence Visseau noted that foreign portfolio managers need evidence that the market’s price-discovery mechanism is functioning normally again. He is chief investment officer of Arkevium Capital in Dubai.
Global funds have slowed their retreat from South Korean equities but they are still selling.
Others are staying on the sidelines, with some market participants waiting for further signs of stability. Liao Yiping, a fund manager at Templeton Global Investments in Singapore, said: “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.”
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It’s likely that a few calmer trading days will not be enough to restore confidence. They may need to take further steps to address the issue of leveraged products and their impact on market volatility.
The outstanding balance of margin loans used to finance stock purchases slid to 27.4 trillion won on Aug 4, the lowest level in 2026. This decline in margin debt, combined with the regulatory curbs, may help to reduce the risk of further sharp swings in the market.
Regulatory curbs have been effective so far.