Behind the 100% surge in South Korea's stock market over six months: foreign capital fled 148 trillion Korean won, while retail investors leveraged nearly 100 trillion to take over.

The South Korean stock market staged a globally stunning rally in the first half of the year, but the internal structure of this frenzy is sparking increasingly deep concerns.

In the first half of this year, the Korea Composite Stock Price Index (KOSPI) accumulated a gain of 101.14%, ranking first among major global stock indices. However, according to Yonhap News citing Infomax data, foreign investors net sold a record 148.3 trillion won in Korean stocks during the same period, the largest net selling scale for any first half on record. Meanwhile, individual investors net bought approximately 99.2 trillion won, and institutions net bought about 35 trillion won, with retail investors becoming the main force absorbing foreign selling.

This pattern of "foreign capital exiting, retail investors stepping in," combined with the explosive growth of leveraged ETFs, is amassing systemic risk beneath the calm surface of the market. Goldman Sachs described the KOSPI's trajectory in its latest report as "a massive, self-reinforcing feedback loop" and warned that demand for leverage centered on Asia, particularly South Korea, is pushing the entire leverage chain to its limits.

Foreign capital continues to flee, driven by dual pressures of rebalancing and exchange rates

The large-scale exodus of foreign investors is not without trace. The South Korean securities industry generally believes that the rapid rise of the KOSPI itself constitutes a direct trigger for foreign selling.

As the weight of Korean stocks in global investment portfolios has expanded significantly due to the surge in stock prices, foreign investors face rebalancing pressure and need to actively reduce holdings to maintain established asset allocation ratios. Korea Investment & Securities pointed out, "The market value of foreign-held stocks corresponding to the KOSPI index has risen far beyond the index itself, and its proportion in the overall index has climbed to the highest level since the financial crisis." He believes that before the upward momentum of the KOSPI clearly slows, the trend of persistent net selling by foreign investors is difficult to reverse.

Exchange rate factors have further intensified foreign investors' willingness to sell. Since May this year, the won-dollar exchange rate has continued to weaken, rising from 1,483.3 won to 1,549.4 won over two months, depreciating by a cumulative total of about 66.1 won. To avoid exchange rate losses, foreign investors net sold 92.9 trillion won during this period, accounting for over 60% of the total net selling in the first half.

A researcher at KB Securities warned that the potential sellable inventory of foreign investors is "estimated to be no less than the amount already sold," and predicted that the strong dollar and foreign securities selling in the second half will push the won exchange rate further upward, with an upper limit possibly touching 1,580 won, but it is expected to fall back to the 1,400 won range after the fourth quarter.

Retail investors step in with high leverage, the feedback loop conceals fragility

While foreign capital continues to exit, South Korean retail investors have become the main support force in the market with a net buying volume of nearly 100 trillion won, and a significant portion of this has amplified exposure through leverage tools.

In the first half of this year, leveraged ETF products became the brightest stars in the Korean market. According to data from the Korea Exchange and Infomax, the top 12 ETF returns in the first half were all leveraged products—that is, products tracking twice the daily return of the underlying index. Among them, "TIGER 200 IT Leverage" topped the list with a return of 764.07%, while "KODEX Semiconductor Leverage" and "TIGER Semiconductor TOP 10 Leverage" ranked second and third with returns of 493.80% and 361.23%, respectively.

The single-stock leveraged ETF for SK Hynix, listed on May 27, also performed strongly after listing, with its returns since listing occupying the top seven positions.

However, the other side of this leverage feast is sharply amplified market volatility. A researcher at Mirae Asset Securities pointed out, "With the rapid expansion of ETF markets both domestically and internationally, the influence of leveraged ETFs continues to grow, and stock market volatility has structurally increased significantly." He also cautioned, "Although leveraged ETFs amplify fluctuations, the direction of stock prices ultimately synchronizes with earnings performance. Currently, we should prepare to shift from concentrated holdings to a broader allocation."

Goldman Sachs warns: The leverage chain approaches its limits

The leveraging behavior of retail investors is not an isolated phenomenon but a highly sensitive node in the global leverage system.

Goldman Sachs futures trading expert Robert Quinn warned in the latest edition of Goldman Sachs Weekly Brief that the financing rate for S&P 500 Total Return Futures (SPX TRF) expiring in September hit the federal funds rate plus 127.5 basis points at its peak last Friday, with dealer leverage rising to its mid-year historical high. Quinn directly attributed the core driver of this abnormal rise to Asia—especially South Korea—and its seemingly "endless" demand for leverage.

According to a follow-up report by Bloomberg, the explosive growth of leveraged ETF products, the expansion of retail margin accounts, and the surge in hedge fund deposits with prime brokers have collectively driven an unusual mid-year jump in market financing costs, which have now reached their highest level since December 2024. Andy Kent of Kyte Brokerage said, "Leverage has become one of the most central themes for investors right now, with margin debt high and borrowing continuing to expand across all parts of the shadow banking system."

Goldman Sachs' report also characterized the KOSPI's trajectory as "a massive, self-reinforcing feedback loop"—rising stock prices attract more leveraged capital, which further drives up stock prices, in a repeating cycle. The core concern in the market is: once dealer financing spreads become unbearable for a counterparty, liquidity suddenly tightens, the entire leverage chain reverses rapidly, and asset prices face a cliff-like crash risk.

Institutions raise targets, but risk divergence intensifies

Despite frequent risk signals, domestic South Korean securities firms remain optimistic about the market outlook for the second half, mainly based on the continuous improvement in earnings expectations for semiconductor companies.

Korea Investment & Securities and Samsung Securities have both raised their target for the KOSPI's upper limit in the second half to 11,000 points, and Daishin Securities has raised it further to 11,500 points. A researcher at NH Investment & Securities said, "Individual investors are concentrating their purchases on semiconductor ETFs, and the earnings momentum of memory semiconductor companies continues, with relatively low valuation pressure. The preference for semiconductor ETFs is expected to persist in the short term."

However, Korea Investment & Securities also acknowledged that the expected foreign capital inflows from the listing of SK Hynix ADRs and the inclusion of Korean government bonds in the WGBI (World Government Bond Index) "are still difficult to offset the persistent net selling trend of foreign investors in the domestic stock market, considering the absolute scale and the timing of inflows."

Against the multiple backdrops of high leverage, continued foreign capital outflows, and exchange rate pressure, whether this rally dominated by retail investors and leveraged capital can sustain is facing an increasingly severe test.

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