Behind the 100% surge in the South Korean stock market in half a year: foreign capital outflow of 148 trillion won, retail investors took on nearly 100 trillion won with leveraged buying

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The South Korean stock market staged a globally eye-catching surge in the first half of the year, but the internal structure of this frenzy is increasingly sparking deeper concerns.

In the first half of this year, the Korea Composite Stock Price Index (KOSPI) saw a cumulative rise of 101.14%, topping all major global indices. However, according to Yonhap News citing Union Infomax data, foreign investors net sold 1,483 trillion won worth of Korean stocks during the same period, marking the largest net sell-off in history for the same period. Meanwhile, individual investors net bought about 992 trillion won and institutions net bought about 350 trillion won, making retail investors the main force absorbing the sell-off from foreign capital.

This pattern of "foreign capital fleeing, retail investors taking over," combined with the explosive growth of leveraged ETFs, is accumulating systemic risks beneath the seemingly calm surface of the market. Goldman Sachs described KOSPI’s trends in its latest report as "a massive, self-reinforcing feedback loop," and warned that Asian demand for leverage, centered on Korea, is pushing the entire leverage chain to its limits.

Foreign capital continues to flee, dual pressure from rebalancing and exchange rates

The large-scale departure of foreign investors is not without reason. The Korean securities industry generally believes that the rapid rise in KOSPI itself is a direct trigger for foreign selling.

As the weight of Korean stocks in global investment portfolios has significantly increased due to the surge in stock prices, foreign capital faces rebalancing pressure and must actively sell to maintain established asset allocation ratios. Korea Investment Securities pointed out, "The market value of Korean stocks held by foreigners has risen far more than the index itself, with its share of the overall index at its highest since the financial crisis." It believes the trend of continued net selling by foreigners will be hard to reverse until the upward momentum of KOSPI visibly slows.

Exchange rate factors further intensify the selling willingness of foreign capital. Since May this year, the Korean won has continuously weakened against the US dollar, rising from 1,483.3 won to 1,549.4 won within two months, depreciating by about 66.1 won. To avoid exchange losses, foreign investors net sold 929 trillion won during this period, accounting for more than 60% of the total net sell-off in the first half.

KB Securities researchers warn that the potential sellable stock held by foreigners "is estimated to be no less than what has been sold so far," and expect that a strong dollar in the second half and foreign selling will drive the won/USD rate higher, possibly reaching 1,580 won, though it is expected to fall back to the 1,400 won range after the fourth quarter.

Retail’s high leverage takeover, feedback loop conceals fragility

As foreign capital continuously retreats, Korean retail investors have become the main support of the market, with net purchases approaching 1 trillion won, and a considerable portion amplified by leverage tools.

In the first half of this year, leveraged ETF products became the brightest stars in the Korean market. According to Korea Exchange and Union Infomax data, the top 12 ETF returns in the first half were all leveraged products — those tracking double the daily returns of their underlying indices. Of them, "TIGER 200IT Leverage" led with a 764.07% increase, "KODEX Semiconductor Leverage" and "TIGER Semiconductor Top10 Leverage" ranked second and third with gains of 493.80% and 361.23%, respectively.

The SK Hynix single-stock leveraged ETF, listed on May 27, also performed brilliantly, dominating the top seven spots in returns since listing.

However, the flip side of this leverage feast is rapidly amplified market volatility. Mirae Asset Securities researchers point out, "With the rapid expansion of both domestic and overseas ETF markets, the influence of leveraged ETFs continues to grow, and the structural volatility of the stock market has markedly increased." They also cautioned, "While leveraged ETFs amplify volatility, stock price direction ultimately aligns with performance. Currently, preparations should be made to shift from concentrated positions to broader allocations."

Goldman Sachs warning: The leverage chain is nearing its limit

Retail investors' leverage behavior is not an isolated phenomenon, but a highly sensitive node in the global leverage system.

Goldman Sachs futures trading expert Robert Quinn warned in the latest "Goldman Weekly Brief" that the financing rate on September S&P 500 Total Return Futures (SPX TRF) touched the federal funds rate plus 127.5 basis points last Friday, with dealer leverage reaching a mid-year historical high. Quinn attributes the unusually elevated core driver directly to Asia — especially Korea — for its almost "endless" demand for leverage.

According to Bloomberg’s follow-up reporting, the explosive growth of leveraged ETF products, the expansion of retail margin accounts, and surging deposits of hedge funds at prime brokers have together pushed market financing costs to an unusual mid-year spike, now at their highest since December 2024. Andy Kent of Kyte Brokerage said, "Leverage has become one of the most pivotal themes for investors right now. Margin debt is high and lending across all aspects of the shadow banking system continues to expand."

Goldman also described KOSPI’s trend as "a massive, self-reinforcing feedback loop" — rising stock prices attract more leveraged funds, which in turn push prices higher, in repeated cycles. The core concern is: once dealer financing spreads become unbearable for a trading counterpart, liquidity will suddenly tighten, the entire leverage chain will swiftly unwind in reverse, and asset prices face the risk of a cliff-edge plunge.

Institutions raise targets, but risk divisions intensify

Despite frequent risk signals, Korean domestic brokerages remain optimistic about the second half, mainly due to continuous improvement in semiconductor companies’ performance expectations.

Korea Investment Securities and Samsung Securities have raised their KOSPI target upper limit for the second half to 11,000, with Daishin Securities raising it to 11,500. NH Investment Securities researchers said, "Retail investors are focusing on buying semiconductor ETFs, and the momentum for memory semiconductor companies continues, with relatively low valuation pressure, so preference for semiconductor ETFs is expected to persist in the short term."

However, Korea Investment Securities also admits that the anticipated inflow of foreign capital from SK Hynix ADR (American Depository Receipts) listings and the inclusion of Korean government bonds in the WGBI (World Government Bond Index), "given the absolute scale and timing window of inflows, is still unlikely to offset the ongoing net sell-off trend by foreign capital in the domestic stock market."

Against the backdrop of high leverage, continued foreign capital outflow, and currency weakness, whether this rally dominated by retail and leveraged funds can be sustained is facing increasingly severe tests.

Risk warning and disclaimerThe market comes with risks; investments need caution. This article does not constitute personal investment advice and does not take into account the special investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article suit their particular situation. Investing based on this article is at your own risk. ```