The intense volatility rocking South Korea\u2019s chip-heavy stock market has come to America, but \u200bWall Street has suffered only modest losses in response. <\/p>\n
Can this continue, or will the \u200cslump in semiconductors and vulnerability among highly leveraged investors cause serious damage in the U.S. as well?<\/p>\n
The benchmark KOSPI index – heavily concentrated in firms benefiting from the artificial intelligence boom, most notably the trillion-dollar megacaps Samsung and SK Hynix – is down more than 30 per cent from its peak only a month ago, and volatility has soared. <\/p>\n
Daily moves of 4 per cent or more are now regular \u2060occurrences, and \u200b30-day realized volatility has exploded to the highest since 1998.<\/p>\n
Regulators in Seoul have ramped up efforts to curb these wild swings in equity prices, which appear to be fueled, in part, by heavily leveraged retail investors using exchange-traded funds (ETFs). These \u201cmom and pop\u201d investors were pulled in by the extraordinary AI boom, and many have been caught out by the rapid snapback.<\/p>\n
Most longer-term buyers are still sitting on substantial gains, of course, with the KOSPI still up 55 per cent this year, following an annual gain of \u200b75 per cent last year. But the same cannot be said of short-term punters. <\/p>\n
According to Goldman Sachs, more than 1.2 \u200cmillion leveraged retail trading accounts in South Korea triggered margin calls as of July 13, with an estimated 320,000\u2013360,000 accounts fully liquidated. Goldman\u2019s strategists reckon this means around one in 30 adults in the country, or 3.4 per cent of the adult population, have received margin calls. <\/p>\n
That could have a meaningful impact on Korea\u2019s economy more widely. If many South Korean households are now sitting on losses, that could weigh on the country\u2019s economy moving forward.<\/p>\n
Given rising retail participation in U.S. stocks, exposure to the AI theme, and the rising popularity of leveraged vehicles, could Wall Street \u2013 and the broader \u200cU.S. economy \u2013 be in trouble \u200bas well?<\/p>\n
The use of leveraged ETFs has \u200cexploded in the U.S. in recent years too. These products use futures or swaps to replicate bets with borrowed money, multiplying returns by typically two, three or even five \u200btimes. But they magnify losses as well. <\/p>\n
U.S. assets under management in these ETFs have \u2060reached a record US$218-billion, up 60 per cent since the end of March alone, according to Scott Rubner at Citadel Securities.<\/p>\n
Leverage tied to technology ETFs has grown \u2060a whopping 136 per cent over the same period, while leverage linked to semiconductor exposure has nearly tripled. Combined, tech and semis now account for 67 per cent of all leveraged ETF assets under management. <\/p>\n
Until recently, this was a \u200bboon for U.S. markets, which have benefitted hugely from the outperformance of chips, AI and tech. <\/p>\n
As Rubner notes, some 19 cents of every dollar allocated to the S&P 500 is directed toward semiconductor companies, with 33 cents going to the \u2018Magnificent 7\u2019 megacaps and nearly 40 cents to the index\u2019s ten largest holdings, most of which are tech firms.<\/p>\n
Put all this together, and you get a \u201cconcentration of speculation\u201d that magnifies the potential for a heavy drawdown when sentiment turns, says Bob Elliott at Unlimited.<\/p>\n
\u201cIt\u2019s just leverage working in reverse. Everyone loves it on the way up, but not so \u2060much on the way down,\u201d he says, adding that he sees a \u201cpretty high chance\u201d of broader asset prices getting dragged down.<\/p>\n
It\u2019s worth noting that the value of assets under management in leveraged ETFs represents less than 1 per cent of total ETF and mutual fund assets, according to Goldman Sachs. But the direction of travel is clear. <\/p>\n
Since 2021, the retail share of U.S. trading volumes in leveraged index ETFs has been roughly double the share for those tracking the same indices without leverage. <\/p>\n
And margin balances – the amount borrowed by retail investors from brokers to buy stocks \u2013 at retail investment firms Interactive Brokers, Robinhood, and Charles Schwab rose to 1.8 per cent of customer assets earlier \u2060this year, a new record.<\/p>\n
If you zoom out to all brokerage firms registered with the Financial Industry \u200bRegulatory Authority, margin balances rose to US$1.3-trillion earlier this year, or 52 per cent of gross customer balances, according to Goldman. That\u2019s the highest share on record, and 6 percentage points \u2060above the previous record high set in 1998, although it includes institutional money and borrowing to fund short positions as well.<\/p>\n
The chip selloff will be putting these positions under pressure. While the S&P 500 and Nasdaq are only 2 per cent and \u200c7 per cent off their June peaks, respectively, the \u2018SOX\u2019 semiconductor index is 25 per cent below its recent high. That means it\u2019s technically in a bear market, and 30-day realized volatility is the highest \u200bsince 2003.<\/p>\n
Retail and leveraged investors \u2013 not to mention the broader market \u2013 could be in for a tough few weeks. While there\u2019s little risk that these juiced tech bets could lead to a financial crisis or systemic issue on Wall Street, given the depth and diversification of U.S. markets, there\u2019s still enough smoldering tinder for investors to get burned.<\/p>\n","protected":false},"excerpt":{"rendered":"The intense volatility rocking South Korea\u2019s chip-heavy stock market has come to America, but \u200bWall Street has suffered…\n","protected":false},"author":2,"featured_media":92813,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[18487,18478,18488,1523,18470,18489,363,18469,18483,18484,18480,18471,18468,119,12048,77,18482,18476,18498,18472,18473,9581,171,18479,2659,1175,18490,18475,18493,18494,18496,8374,18495,4262,18492,18474,17865,18486,414,18485,18491,18477,1013,4714,18481,17057,76,18497],"class_list":["post-92812","post","type-post","status-publish","format-standard","has-post-thumbnail","category-korea","tag-alberta","tag-arts-news","tag-bc","tag-breaking-news","tag-breaking-news-video","tag-british-columbia","tag-canada","tag-canada-news","tag-canada-sports","tag-canada-sports-news","tag-canada-trafficcanada-weather","tag-canadian-breaking-news","tag-canadian-news","tag-economy","tag-education","tag-environment","tag-federal-government","tag-foreign-news","tag-globe-and-mail","tag-globe-and-mail-breaking-news","tag-globe-and-mail-canada-news","tag-government","tag-korean","tag-life-news","tag-lifestyle","tag-local-news","tag-manitoba","tag-national-news","tag-new-brunswick","tag-newfoundland-and-labrador","tag-northwest-territories","tag-nova-scotia","tag-nunavut","tag-ontario","tag-pei","tag-photos","tag-political-news","tag-political-opinion","tag-politics","tag-politics-news","tag-quebec","tag-sports-news","tag-technology","tag-travel","tag-trudeau","tag-us-news","tag-world-news","tag-yukon"],"_links":{"self":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/posts\/92812","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/comments?post=92812"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/posts\/92812\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/media\/92813"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/media?parent=92812"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/categories?post=92812"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/korea\/wp-json\/wp\/v2\/tags?post=92812"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}