GF Securities Strategy: The South Korean stock market enters the early stage of deleveraging, risks are far from cleared

Gelonghui, July 21 – The GF Securities Strategy Team believes that the current round of KOSPI's decline is characterized by "low valuation and high panic." Although the index has significantly retreated from its June peak, valuations are still at historical lows, indicating that the drop is not primarily driven by a valuation bubble. Instead, risks stem more from excessive concentration in Samsung Electronics and SK Hynix, as well as market concerns about AI capital expenditures, memory market conditions, and the sustainability of earnings.

Leverage in the Korean stock market mainly comes from margin financing, leveraged ETFs, and on- and off-exchange derivatives. These different tools display significant differences in investor profiles, transmission mechanisms, and risk transparency. Currently, the scale of domestic leveraged ETFs in Korea has decreased by 28.3%, while margin financing has only shrunk by 9.3% from its peak, indicating that the market is still in the early stages of deleveraging. Meanwhile, exchange-traded derivatives remain at historical highs, suggesting that the clearing of leverage is gradually shifting from the ETF side to the margin financing and derivatives sides. Deleveraging in the KOSPI has started, but there is a clear divergence in the pace of clearing between credit leverage and trading structure leverage. The expansion of leveraged ETF scale has been the main driver for increased leverage in this cycle. Currently, after significant withdrawals by Korean retail investors during the initial decline, there are signs of a slight rebound in net subscriptions.

Historical experience shows that leverage clearing typically goes through the phases of "initial rapid release—leverage buildup during rebounds—multiple rounds of choppy reduction—return to historical averages," with the entire process possibly lasting around a year. Given that margin financing and derivatives deleveraging in Korea are still insufficient and ETF funds are seeing a phased return, it is still too early to conclude that this round of deleveraging is over.

In summary, KOSPI is still in the phase of significant price adjustment and initial leverage clearing, but no systemic liquidity crisis has formed. The current proportion of unsettled margin transactions remains within a normal range, suggesting that retail investors have not yet faced large-scale margin call failures or forced liquidations. However, foreign and institutional reductions, retail investor absorption, and the simultaneous return of leveraged capital are causing an unstable period of market position redistribution. Going forward, three risk transmission chains should be closely monitored: first, the expansion of foreign capital outflows and weakening retail investor absorption could shift the market from position transfer to increased selling; second, leveraged ETFs may turn from contrarian purchases to redemptions during declines; third, simultaneous deterioration in margin financing, derivatives margins, and unsettled forced liquidations may cause partial adjustments to evolve into both active and passive deleveraging resonance.