SK Hynix Soars 30%—But Is It a Warning Sign? Bigger Storm Looming for South Korean Stocks

Barron's reported that SK Hynix (SKHY-US) surged 30% in South Korea's stock market on Friday (31st), while Samsung Electronics also jumped 27%, sending the Korea Composite Stock Price Index (KOSPI) soaring by 18%. Amid renewed capital inflows into artificial intelligence (AI) stocks, this strong rebound has temporarily eased investor concerns. However, the extreme volatility has also revealed long-term structural risks in the South Korean equity market.

SK Hynix closed at 1.718 million South Korean won (approximately $1,197), with the two memory chip giants—SK Hynix and Samsung Electronics—serving as the primary drivers behind the KOSPI's surge. Year-to-date through Friday’s close, the KOSPI has risen 57%, making it the world’s best-performing major stock index. Yet, the rally has been far from smooth. Data from the London Stock Exchange Group (LSEG) shows that three of the KOSPI’s four largest single-day declines over the past decade occurred within the last five weeks.

Recently, South Korean retail investors have aggressively bet on SK Hynix and other tech stocks, increasingly using high-risk instruments like leveraged ETFs. These ETFs use options, swaps, and other derivatives to amplify daily price movements of the underlying assets. As a result, if the market declines, investors require a much larger rebound just to break even, and daily rebalancing can erode long-term returns.

Markets had initially hoped that the recent pullback in AI stocks, combined with rising regulatory and political pressure in South Korea, would prompt investors to reduce leverage and stabilize the market. However, the astonishing gains by SK Hynix and Samsung Electronics on Friday suggest that retail investors still have substantial capital at their disposal. If retail investors again use leveraged ETFs to chase lost gains, it could set the stage for even more severe market volatility ahead.

That said, this does not mean investors should avoid SK Hynix’s American Depositary Receipts (ADRs). The company’s ADR rose 5.9% in pre-market trading on Friday, reaching $158.07. Each 10-share ADR represents one ordinary share of the South Korean stock. Due to strong U.S. investor demand and barriers to converting between ADRs and ordinary shares, SK Hynix’s ADR trades at a clear premium over its Korean-listed shares. Barron’s has previously expressed optimism about its outlook, suggesting that SK Hynix offers an alternative way to participate in the memory chip boom compared to Micron (MU-US).

Additionally, Leopold Aschenbrenner, the head of the AI hedge fund Situational Awareness, may have sold off most of his equity portfolio, potentially reducing selling pressure on SK Hynix’s ADR and opening room for further upside.