The South Korean government is attempting to tame market volatility, but analysts remain cautious.

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The greatest advantage of the Korean stock market is evolving into its biggest risk. The enthusiasm for AI trading centered around Samsung Electronics and SK Hynix is fluctuating, continuously amplifying the volatility of the benchmark index KOSPI, and the effectiveness of official interventions is being questioned by analysts.

Korean President Lee Jae-myung has called on regulators to "quickly and proactively" introduce measures to curb speculative trading. The related initiatives include tightening the regulatory rules for single-stock leveraged ETFs, aiming to restrain the most aggressive speculative behavior. However, Marcus Weyerer, Director of ETF Investment Strategy at Franklin Templeton, points out that financial markets are fundamentally adaptive, and investors can easily adjust strategies to cope with rising short-term trading costs.

KOSPI has risen nearly 60% so far this year, ranking among the best-performing stock markets globally. Samsung Electronics and SK Hynix are up 117% and 181%, respectively. But the high concentration of the market structure makes the fragility behind these impressive results ever more apparent.

Two chip giants dominate the index, concentration risk rises

Combined, Samsung Electronics and SK Hynix account for more than half of the KOSPI index weighting, deeply tying the fate of the entire market’s ups and downs to these two semiconductor giants.

Both companies are core suppliers for global AI infrastructure construction, and any sentiment change in AI investment is directly transmitted to the South Korean blue-chip market.

William Bratton, Head of Asia Pacific Cash Equity Research at BNP Paribas, stated, the lack of compelling long-term growth stories outside technology and AI has led investors—domestic and foreign with varying investment horizons and risk appetites—to pour into a handful of stocks simultaneously.

This pattern is hard to change in the short term, meaning any adjustment in investors’ positions will continue to generate volatility. "The lack of market breadth may become a persistent obstacle for the country in attracting long-term capital," he said.

Retail investors rush into leveraged ETFs, regulatory overhaul faces cultural resistance

Since the listing of single-stock leveraged ETFs on May 27, Korean retail investors have collectively invested around $9.45 billion into related products, mostly tracking chip stocks. Net purchases by foreign investors totaled $1.35 billion. These figures are from a research report by KB Financial Group analyst Peter S. Kim.

Citibank estimates that Korean households invested about $70 billion in stocks and ETFs in the second quarter, with potential stock investment capacity ranging from $68 billion to $167 billion through next year's first quarter.

Peter S. Kim believes regulatory actions will struggle to shake Korea’s deeply rooted culture of fast-money investing. He points out that ETFs as mainstream tools are both an opportunity and a threat for the Korean stock market—on the one hand, they divert individual investors from small-cap stocks and the KOSDAQ market; on the other hand, the mass influx of retail investors into leveraged products raises the risk of chain margin calls and makes cultivating a long-term investment culture more complex.

Meanwhile, institutional foreign investors have shifted to net selling in stocks, boosting the dominant position of domestic retail investors, whose behavior itself is highly unstable.

Can the AI rally last? Long-term concerns persist

The original intention of regulators in launching leveraged ETFs was to expand market participation. However, reality has deviated from expectations—the rapid influx of retail funds has boosted the market, but also laid the groundwork for greater volatility risks.

Peter S. Kim bluntly said, facing the rapid evolution of an AI-driven market, the effort to cultivate a long-term investment culture is unlikely to keep pace. If the turbulence of the AI theme continues unchecked, whether the current KOSPI gains can be sustained remains an open question.

Risk Warning and DisclaimerThe market entails risk; investment must be cautious. This article does not constitute personal investment advice and does not consider the unique investment objectives, financial status, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article suit their specific circumstances. Investing based on this is at your own risk. ```