When Will the Korean Stock Sell-Off End? Analysts: Deleveraging Pressure Remains Key for Market Outlook

South Korean stocks have experienced extreme volatility recently, with the benchmark KOSPI index triggering circuit breakers for two consecutive trading days, at one point plunging over 12% intraday to its lowest level since early April. Despite semiconductor heavyweight SK Hynix reporting strong financial results, its stock still plunged 9.61% as it failed to meet the market's exceptionally high expectations.

According to multiple analysts, the primary driver of this market correction is not a deterioration in artificial intelligence (AI) fundamentals, but rather a technical pullback triggered by concentrated unwinding of leveraged ETF positions.

### Memory Giant's Earnings Fail to Restore Confidence

Although SK Hynix delivered solid earnings, even robust figures are no longer sufficient to support share prices in the current market environment.

Gary Tan, portfolio manager at Allspring Global Investments, pointed out that in today’s AI market, even "strong" earnings are no longer enough. Investors are now seeking additional catalysts, particularly signals regarding long-term supply orders and shareholder returns, to sustain confidence in memory stocks, which are central to AI-related trades.

He predicts that without these supporting signals, volatility in Asian AI-related equities will persist as leveraged positions are liquidated and market expectations are reset.

### Technical Deleveraging Triggers Chain Reaction

Frank Benzimra, Head of Asia Equity Strategy at Societe Generale, analyzed that trading positions in the Korean market have become excessively crowded and are now entering a deleveraging phase. He noted that the hardest-hit assets are typically those with the highest leverage multiples, particularly single-stock leveraged ETFs whose assets surged dramatically in May and June.

Benzimra believes the market began showing signs of deleveraging after reaching a peak at the end of June. While it is difficult to determine exactly when this selling pressure will end, he advises caution toward current market participation.

Pierre Hoebrechts, Deputy Chief Investment Officer at East Eagle Asset Management, went further, describing this crash as an "inevitable accident." He pointed out that warning signs were already evident in June: massive capital inflows into SK Hynix and Samsung Electronics, a surge in new brokerage accounts among local investors, highly concentrated leveraged funds, and foreign investors' use of 2x leveraged ETFs as the "final straw"—all combined to trigger this correction.

He expects the sell-off to continue until a significant number of margin accounts complete forced liquidations, though he believes the turning point may not be far off.

### Capital Flows and Regional Market Comparison

On capital movements, Wee Khoon Chong, Asia-Pacific Macro Strategist at BNY Mellon, observed that KOSPI's high volatility indicates internal leverage levels remain elevated. However, he does not believe the market is in panic mode. Fund flow data shows selling pressure is concentrated in IT stocks, while most other sectors show underlying buying demand—suggesting the market is undergoing sector rotation rather than broad collapse.

Fabien Yip, market analyst at IG, noted that many foreign investors chose to book profits early this month, placing heavy selling pressure on both the KOSPI and the Korean won. As market volatility intensifies and participation declines, lower trading volumes could further amplify price swings.

Regarding the broader Asian market outlook, Shingo Ide, Chief Equity Strategist at NLI Research Institute, believes Japanese and Korean markets will diverge. He noted that Japan's market correction is nearing its end, while downside pressure persists in Korea, urging investors to remain vigilant about the ongoing deleveraging process.