Goldman Sachs reviews the plunge in Korean stocks: Pension fund withdrawal and leveraged retail investor blowups triggered a chip stock avalanche

The South Korean stock market plunged sharply from historical highs, as risks long accumulated from structural fragility were unleashed in a concentrated manner under the influence of multiple triggering factors.

On Tuesday, the Korea Composite Stock Price Index (KOSPI) closed down 10% in a single day, with Samsung Electronics and SK Hynix both plummeting over 12%. The two chip giants contributed a total of 71% to the index's decline. The Korea Exchange initiated a 20-minute circuit breaker in the afternoon, but this failed to stop the spread of the downturn, with foreign investors net selling over $2.5 billion worth of KOSPI stocks that day.

Chris Cha, Head of High-Touch Trading for Korea at Goldman Sachs, pointed out in a post-mortem report that the root cause of this crash was not a deterioration in fundamentals, but deep structural weakness in the market—when pension funds turned from buyers to sellers and retail leveraged funds were forcibly liquidated, the marginal buying bids that previously supported the rally instantly collapsed.

The warning effect of this crash on market structure may far surpass the significance of the single-day decline itself. According to Goldman Sachs, recent upward moves in the Korean stock market have been increasingly driven by technical and liquidity factors rather than substantial new fundamental buying; once this fragile support is disturbed, outsized volatility at the index level becomes unavoidable.

Liquidity Structure Imbalance: Retail Investors as the Last Buyers

A deeper background to this crash is the ongoing narrowing of buying structures in the South Korean stock market.

Chris Cha's report noted that foreign capital was not the main driver behind previous rallies, domestic institutional buying capacity was increasingly constrained, and the market had effectively established retail investor funds as the main source of marginal demand. This structure can be sustained during stable market conditions, but is prone to triggering chain reactions when hit by external shocks.

Alexander Redman, Chief Equity Strategist at CLSA Singapore, stated at a briefing, "The magnitude of this volatility is closely related to the degree of bubble in the Korean market, as it is now almost entirely retail-driven."

He bluntly commented, "Seeing this level of volatility is genuinely unsettling."

According to the Korea Financial Investment Association, the outstanding balance of retail margin financing (i.e., margin debt for buying stocks) this month rose to a record 38.5 trillion KRW (about $25 billion).

Kim Namho, fund manager at Seoul's Timefolio Investment Management, said, "Forced liquidations seem to have started around two or three o'clock in the afternoon, and sell orders accelerated the downward movement."

Leverage ETF Regulatory Risk: Policy Signals Shake Technical Buying

Another key thread in this crash is the change in regulatory attitude towards single-stock leveraged ETFs.

On the same day, Korea’s top financial regulator publicly stated regret over the failure to prevent the listing of single-stock leveraged ETFs tied to Samsung Electronics and SK Hynix, mentioning their negative side effects. This statement came as the market was already fragile, with its impact not to be underestimated.

According to Goldman Sachs, the assets under management of 16 domestic leveraged ETFs have grown to $9.1 billion, and the combined scale of two-times leveraged ETFs tracking SK Hynix and Samsung is even higher at $21 billion. Notably, 92% of the assets in domestic leveraged ETFs come from retail investors.

Chris Cha pointed out that single-stock leveraged ETFs amplify price movements in both directions via their rebalancing mechanism, which is especially apparent among highly retail-participated large-cap stocks. Even if regulators don't immediately act, the official expression of "regret" is sufficient for investors to reassess the sustainability of technical buying underpinning the recent rally.

Goldman Sachs listed potential stabilization measures the Financial Services Commission (FSC) could take, including: raising the margin requirements for retail participation in leveraged ETFs, strengthening qualification exams, setting asset-management size limits for individual ETFs, restricting new product launches, and tightening circuit breaker mechanisms when ETF prices diverge from net asset values.

Pension Rebalancing: The Largest Stabilizer Turns into Mechanical Selling

Among the core stresses highlighted by Goldman Sachs is the role shift of Korea’s largest pension fund, the National Pension Service (NPS), in this crash.

Due to previous market gains pushing domestic stock holdings above 30%, surpassing the targeted ceiling of about 28.8%, NPS has preemptively net sold about $1 billion worth of KOSPI over the past six trading days (including today). In June alone, NPS net sales amounted to $1.5 billion, marking the largest monthly net sell since April 2021.

Chris Cha pointed out that pension funds are typically viewed as domestic anchor forces stabilizing the market, but when actual holdings significantly exceed targets, this investor group shifts from passive support to mechanical supply. In a market highly concentrated in a few large-cap tech stocks with technically overstretched momentum, this shift is particularly impactful.

Ahead of Micron’s Earnings, Chip Stocks See Concentrated Reductions

The steeper decline of Samsung Electronics and SK Hynix compared to the index is also closely related to Micron Technology’s earnings report, to be announced Thursday morning Asia time.

According to Goldman Sachs, investor expectations ahead of Micron’s earnings are already very high, which provided preconditions for early reductions.

When market rallies rely increasingly on tactical enthusiasm rather than actual buying, event risks often spark profit-taking far greater in scale than fundamentals alone would suggest.

Fundamentals Unchanged, but Near-Term Path More Cautious

Goldman Sachs' report draws a clear distinction between structural risk and fundamental assessment.

Chris Cha stated that the memory chip cycle is still in an upward phase, AI-related demand remains supportive, earnings expectations at the index level continue to improve, and KOSPI valuations are still considered low. He maintains a constructive medium-term view on the Korean stock market, but has adopted a more cautious stance on near-term movements.

He noted that the next attractive entry point won’t simply appear because the market seems cheaper after a sharp fall, but will require obvious relief from forced selling, stabilization of Samsung and SK Hynix post-Micron earnings, and the establishment of a more stable buying base over several trading days.

"Today’s decline is less a judgment on Korea’s fundamentals than a reminder of how the recent rally was 'financed'," Chris Cha wrote. "Even in a market where the medium-term logic still holds, an overstretched structure can lead to violent corrections."

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