South Korean Stock Market Fund Shift! Retail Investors Withdraw 13.5 Trillion Won in August, Who Will Dominate the Next KOSPI Rally?

South Korean stocks rallied strongly in the first half of this year, fueled by retail investor funds and the artificial intelligence (AI) boom. However, recent sustained retail fund outflows are gradually shifting the market's capital structure.

Kim Hak-kyun, head of the research center at Shinyoung Securities, points out that the previous dynamic where retail investors offset foreign selling pressure is changing. Whether the Korea Composite Stock Price Index (KOSPI) can rebound will now heavily depend on foreign investor movements.

Kim stated that in the first half of this year, massive inflows from South Korean retail investors effectively countered foreign outflows. However, retail fund flows have now clearly shifted, and the supply-demand structure will differ from the first half.

According to Kim's estimates of actual fund flows, including unsettled trades and margin transactions, South Korean retail investors recorded a net outflow of 13.5 trillion won (approximately $9.7 billion) from domestic stocks in August. As of September 18, cumulative net outflows for September reached 9.83 trillion won (about $7.1 billion), with average daily outflows exceeding those in August.

Kim noted that unlike the past, retail funds continue to flow out even after market corrections, reflecting that retail investors have been significantly impacted by short-term sharp volatility.

Middle East, Oil Prices, and US Yields to Influence Foreign Investors

Looking ahead, Kim believes that the Middle East conflict, global oil prices, and US long-term interest rates will be crucial factors determining whether foreign investors return to Korean stocks.

He stated that if the Middle East situation eases, oil prices stabilize, and US long-term Treasury yields decline, global capital could be reallocated to non-dollar assets, potentially favoring foreign inflows into the Korean market.

Additionally, the recent moderation of the Korean won's depreciation trend, coupled with foreign investors having already significantly reduced their KOSPI holdings, increases the likelihood of improved market supply-demand dynamics.

Kim emphasized that the market should focus on market-determined long-term interest rates rather than whether the Federal Reserve adjusts its benchmark rate further. He believes the recent rise in US long-term yields is primarily due to the widening fiscal deficit caused by the Middle East conflict and rising oil prices, not economic overheating or underlying inflationary pressures.

Therefore, the future development of the Middle East conflict could further impact the Korean stock market through channels such as oil prices, long-term yields, and foreign capital flows.

High-Leverage Fund Retreat Exacerbates KOSPI Correction

Looking back at the KOSPI's performance this year, retail and leveraged funds were key drivers of the rally. Driven by upward revisions in global AI capital expenditure and rising memory chip prices, the KOSPI rose from around 4,200 points at the start of the year, briefly surpassing 9,000 points in mid-June, doubling in value year-to-date.

The memory chip sector saw particularly strong gains. According to Guohai Securities, SK Hynix and Samsung Electronics saw their stock prices rise 307.8% and 179.1% respectively in the first half of 2026. The combined market capitalization of the two companies as a proportion of the total KOSPI market cap rose from about 35% at the start of the year to a peak of around 57% on June 25.

Accompanying the stock market surge, South Korean retail funds poured in. As of June 24, the number of domestic stock trading accounts in South Korea reached 108.77 million, while the country's total population is just over 50 million. A significant portion of these funds entered the market through high-leverage ETFs.

However, the risks of leveraged trading quickly emerged after the market reversed in July. The KOSPI underwent a sharp correction, briefly falling below 5,300 points, nearly halving from its year-to-date high.

South Korean regulators subsequently took intensive measures. On July 16, financial regulators announced a suspension of new single-stock leveraged ETF listings, raised the minimum margin requirement from 10 million won to 30 million won, and limited it to cash.

On July 29, after the KOSPI triggered circuit breakers for two consecutive days, South Korea introduced a second phase of measures, including limiting the maximum proportion of leveraged ETFs in an investor's overall portfolio and increasing transaction costs to curb speculative trading.

A report by CITIC Securities in early August indicated that margin debt in Korean stocks fell from a peak of 38.6 trillion won on June 24 to 27.4 trillion won on August 3, a decrease of about 11 trillion won (29%) in one month, wiping out the leverage accumulated during the semiconductor rally from February to June.

CITIC Securities noted that while the peak margin debt was less than 1% of the total market capitalization, the high concentration of leverage in a single sector made the associated risks more prominent during the market correction. Furthermore, other leveraged instruments exist in the Korean over-the-counter market, such as CFDs, securities-backed loans, and OTC options/TRS, which are not fully reflected in the margin debt data.

At the same time, the listing of 2x bull single-stock ETFs changed the transmission path of tail risk, creating an extreme imbalance between long and short positions. The end-of-day forced liquidation rules can easily trigger a spiral sell-off.

Recently, the KOSPI has been mainly oscillating in the 6,800 to 7,100 point range, with frequent intraday rallies followed by declines.

Whether Foreign Capital Returns Becomes the Next Market Variable

With retail funds continuing to flow out and high-leverage funds contracting sharply, whether foreign investors will re-enter the market has become a key focus for the KOSPI's future trajectory.

Simon Woo, head of Korea research at BofA Securities, stated that long-term agreements for chip companies and improved shareholder returns could act as catalysts to attract global capital back to South Korean tech stocks in the next phase.

In an interview on September 21, Woo said that if long-term agreements materialize, the market might perceive Asian tech stocks as having lower cyclicality and reduced risk. Additionally, measures such as increasing dividend yields and share buybacks could also attract investors to re-engage with AI-related stocks.

JP Morgan, in a report on September 21, maintained an 'Overweight' rating on Samsung Electronics with a target price of 400,000 won, stating that its medium-term risk-reward remains attractive.

The firm noted that while Samsung Electronics' Q3 earnings preview shows strong memory business operations, the won's appreciation presents a currency headwind, leading to a downward revision of its earnings forecast.

On the other hand, UBS recently lowered its 12-month target for the KOSPI from 8,800 points to 8,000 points, and cut the implied P/E ratio from 8x to 7x, primarily citing higher interest rates, a stronger won, and rising oil prices.