South Korean stocks experienced a severe selloff on July 13, with the KOSPI index plunging 669.01 points (8.95%) to close at 6,806.93, driven primarily by sharp declines in semiconductor giants SK Hynix and Samsung Electronics. SK Hynix recorded its steepest single-day drop of 15.37% since its December 1996 listing, triggered by downgraded second-quarter earnings forecasts and shifting investor flows following its NASDAQ ADR debut. The combined market capitalization loss for Samsung Electronics and SK Hynix reached 431 trillion won, while 14 single-stock leveraged ETFs tracking these companies amplified volatility with declines ranging from 21.75% to 32.60%, prompting South Korea's Financial Supervisory Service to convene asset management executives for discussions on stricter oversight measures.
Korean Investment & Securities Downgrades SK Hynix Q2 Earnings Forecast
Korean Investment & Securities revised SK Hynix's second-quarter operating profit estimate to 60.4 trillion won, representing a 7.08% reduction from the market consensus of 65 trillion won. The brokerage attributed the downward revision to SK Hynix's higher sales proportion of high-bandwidth memory (HBM), which has experienced slower price appreciation compared to conventional DRAM and NAND flash memory products. This earnings forecast adjustment contributed to lowering the firm's full-year operating profit projections for SK Hynix. The stock's 15.37% decline on July 13 marked the largest single-day percentage drop in the company's 29 years and 7 months of trading history since its December 1996 listing.
Foreign Investors Shift from KOSPI to NASDAQ ADR Following UBS Strategy
UBS issued a research report on July 7 (local time) recommending investors adopt a "buy ADR, sell Korean stock" strategy ahead of SK Hynix's NASDAQ listing. Foreign investors subsequently net sold over 3.1 trillion won of SK Hynix shares on the KOSPI over two trading days (July 10 and 13). In contrast, SK Hynix's American Depositary Receipts debuted on NASDAQ on July 10 at $168.01, closing 12.76% above the initial public offering price of $149. Kim Seok-hwan, a researcher at Mirae Asset Securities, stated: "Investors engaged in profit-taking on SK Hynix shares on the KOSPI while actively purchasing ADRs on NASDAQ, resulting in divergent liquidity flows that drove stock prices in opposite directions."
Samsung Electronics (including preferred shares) and SK Hynix together account for 52.85% of KOSPI's total market capitalization based on closing prices on July 13. The KOSPI index fell below 7,000 for the first time in two months, marking the first occurrence since May 6 when the benchmark initially surpassed that threshold. Total KOSPI market capitalization declined by 546 trillion won in a single trading day.
FSS Chairman Lee Chan-jin Addresses Leveraged ETF Volatility Concerns
Financial Supervisory Service Chairman Lee Chan-jin met with chief executive officers of asset management companies at the Korea Financial Investment Association offices in Yeouido, Seoul, on July 13. Lee addressed issues related to tracking error management and advertising practices for single-stock leveraged exchange-traded funds. He stated: "Since investors primarily rely on asset managers' advertising when directly selecting ETFs, false or exaggerated advertising by asset managers is a very serious matter from an investor protection perspective." The 14 single-stock leveraged ETFs that track ±2x daily returns of Samsung Electronics and SK Hynix fell between 21.75% and 32.60% on July 13, further amplifying KOSPI volatility. The KOSPI 200 Volatility Index (VKOSPI) closed at 83.33, up 6.63% from the previous trading day.
Financial authorities plan to introduce measures to address volatility in single-stock leveraged ETFs. Potential solutions under consideration include substantially raising the current 10 million won margin deposit requirement and strengthening investor education programs.
Global Analysts Question Asian Semiconductor Stock Valuations
The Financial Times reported on July 13: "Several fund managers including Fidelity International and BlackRock are expressing concerns about whether the upward momentum in share prices of companies such as Taiwan's TSMC, South Korea's SK Hynix, and Samsung Electronics can be sustained." However, some market participants view the recent decline as a short-term correction. Cho Jun-ki, a researcher at SK Securities, stated: "The domestic stock market is currently in a situation where investor sentiment is driving stock indices," adding that "there has been no change in the fundamental growth trajectory of semiconductor companies." Bloomberg reported that KOSPI valuations are lower than during the global financial crisis, indicating the index is relatively undervalued.
FAQ
What caused SK Hynix stocks to drop 15.37% on July 13?
SK Hynix declined 15.37% following Korean Investment & Securities' downward revision of the company's second-quarter operating profit forecast to 60.4 trillion won (7.08% below market consensus of 65 trillion won). The brokerage cited SK Hynix's higher sales proportion of high-bandwidth memory, which experienced slower price appreciation compared to conventional DRAM and NAND flash products. Additionally, foreign investors net sold over 3.1 trillion won of SK Hynix shares over two trading days following UBS's July 7 recommendation to "buy ADR, sell Korean stock."
How did single-stock leveraged ETFs affect KOSPI volatility on July 13?
The 14 single-stock leveraged ETFs tracking ±2x daily returns of Samsung Electronics and SK Hynix fell between 21.75% and 32.60% on July 13, amplifying overall market volatility. The KOSPI 200 Volatility Index (VKOSPI) rose 6.63% to close at 83.33. In response, Financial Supervisory Service Chairman Lee Chan-jin convened asset management company CEOs to address tracking error management and advertising practices, with authorities planning to introduce stricter oversight measures including potentially raising the current 10 million won margin deposit requirement.
