South Korean Stocks Rebound After 40% Plunge? Deleveraging Over Halfway Complete, KOSPI Valuation Hits Record Low

After enduring the most severe wave of selling and forced liquidations this year, South Korea's stock market turbulence appears to be gradually subsiding. With leveraged positions being rapidly cleared and regulators introducing new rules to restrict high-risk product trading, the Korean Volatility Index has dropped from its record high in June to a near two-month low last week.

The previous sharp market swings were largely driven by a leverage trading bubble, and Morgan Stanley analysis indicates that this deleveraging process is now over halfway complete.

Data shows that from its June peak, the Korea Composite Stock Price Index (KOSPI)一度 plunged nearly 40%. Year-to-date, overseas funds have cumulatively sold over $100 billion worth of Korean stocks, and emerging market funds have significantly reduced their exposure to Korean equities.

Despite the easing volatility, overseas institutional investors have not rushed in to buy the dip. Several fund managers admit that while volatility has retreated from its peak, it remains relatively high. Investors must balance historically low valuations and improving earnings outlooks against the risk of renewed market turbulence.

Isaac Tong, Senior Investment Director at Aberdeen Asia Income Fund in Singapore, said his firm's stance on Korean stocks has turned cautiously optimistic, but not yet fully confident. "Only when the expected return is high enough to justify the current volatility risk will we see a genuine market turnaround. We are still waiting for that moment."

Looking back at the turmoil, South Korea's volatility index briefly surged past 96.9 in June, a dramatic increase from 28.9 at the end of 2025.

Last month, the Korean stock market triggered its 8% circuit breaker four times, halting trading for 20 minutes each time. Nearly half of KOSPI's trading days saw price swings exceeding 5%, with the market soaring 18% in a single day on July 31, setting a record for the largest daily gain in history.

In response to such extreme volatility, South Korean regulators have taken successive measures. On July 31, authorities raised the cash margin requirements for individual stock leveraged ETFs, causing trading volumes and asset sizes of funds linked to Samsung Electronics (005930KS) and SK Hynix (000660KS) to immediately decline.

Regulators have stated they will continue introducing further measures to suppress investor demand for high-leverage products.

Under the dual pressure of the market crash and tightening regulations, a large number of retail investors who had previously entered the market due to bullish sentiment have been "washed out."

According to statistics from the Korea Financial Investment Association, the scale of forced liquidations in retail accounts reached approximately 1 trillion won (about $710 million) in June and 993 billion won in July, making these the two months with the highest forced liquidation amounts this year.

As of August 4, margin borrowing for stock trading dropped to 27.4 trillion won, the lowest level since the beginning of the year.

Viso, Chief Investment Officer at Dubai-based Arkevium Capital, believes the Korean market structure is gradually shifting from retail-dominated to institutionally-driven by overseas players. "But a few days of stable trading are far from enough. Overseas institutions need to see clear evidence that the market's price discovery mechanism has returned to normal operation."

Following this wave of selling pressure, some valuation metrics for Korean stocks have fallen to relatively low levels. The 12-month forward P/E ratio of the KOSPI has dropped to 5.1x, hitting a historic low. However, this low valuation has yet to attract significant capital inflows.

Earlier this year, buoyed by the AI chip boom, Korean stocks experienced a strong rally. However, the excessively high volatility, combined with market concentration in just two chip giants—Samsung Electronics and SK Hynix—planted the seeds of a potential bubble.

Liao Yiping, Fund Manager at Templeton Global Investments in Singapore, noted that Samsung Electronics and SK Hynix are indeed undervalued with positive earnings outlooks. "But persistently high market volatility has made short-term investors more cautious. Given such extreme price swings, capital won't flow back in large volumes quickly, but rather in small, staggered amounts."

Exchange data also shows that while the pace of foreign capital exiting Korean stocks has slowed, selling pressure has not ceased. After setting a record $30 billion net sell-off in June, foreign investors sold $6.2 billion net in July and $4.3 billion net in August so far.

Nonetheless, optimistic voices remain in the market. Goldman Sachs reaffirmed this week its 12-month target of 12,000 points for the KOSPI, implying approximately 90% upside from last Friday's closing level.