Is Korea really becoming 'uninvestable'?

Officials work at Hana Bank's dealing room in Seoul, Wednesday. Yonhap

Korea's recent stock market turmoil has reignited debate over whether the country's equity market is becoming "uninvestable," but analysts said Wednesday the recent sell-off has done little to undermine its underlying fundamentals.

The assessment follows a Bloomberg column published the previous day, which blamed the government's handling of single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK hynix for undermining investor confidence.

The sharp criticism prompted the Financial Services Commission (FSC) to issue a rare rebuttal late Tuesday, rejecting the article's claims and defending Korea's market fundamentals.

"The column reflects some of the concerns foreign investors have, but I think it overstates the case," Shim Jong-min, head of Korea Research at CLSA, told The Korea Times.

He said the introduction of single-stock leveraged ETFs became a major catalyst for the market's sharp swings, but stressed they were only one part of a much broader picture.

According to Shim, the correction was driven by a combination of factors, including the unwinding of crowded artificial intelligence (AI)-related trades by global hedge funds, foreign investors' portfolio rebalancing and speculative trading by domestic retail investors in leveraged ETF products.

Still, he said regulators missed an opportunity to calm markets as volatility intensified, arguing that authorities could have sent stronger policy signals and introduced market stabilization measures before panic selling accelerated.

"Policy mistakes can happen. What's important is explaining what went wrong and presenting follow-up measures," Shim said, adding that investor confidence could recover if authorities communicate more actively with the market and roll out stronger stabilization measures.

Cindy Park, head of Korea Equity Research at Nomura Securities, also rejected the view that the recent correction could be explained by leveraged ETFs alone.

Park said the recent market correction was driven by heavy foreign selling as Korea's weighting in global benchmarks exceeded portfolio allocation limits, as well as the rapid growth of leveraged ETFs and weakening institutional support as the National Pension Service neared its domestic equity allocation ceiling.

"These factors led to amplified volatility despite resilient corporate fundamentals," she said. "As market 'deleveraging' progresses and foreign selling pressure eases, the next leg of Korea's re-rating is likely to be supported by corporate share buybacks and treasury share cancellations, particularly from large-cap companies."

The debate comes amid one of the wildest swings in the Korean equities market's history.

Financial authorities approved single-stock leveraged ETFs on May 27, allowing investors to take leveraged positions tied to Samsung Electronics and SK hynix.

Financial Services Commission Chairman Lee Eog-weon speaks during a parliamentary meeting at the National Assembly in Seoul, July 29. Yonhap

Since the products' launch, the benchmark KOSPI has experienced a series of sharp swings, particularly in AI-related semiconductor stocks. The benchmark index tumbled nearly 10 percent in a single session on July 28 before rebounding almost 18 percent by the end of the week, earning the nickname "Roller KOSPI," a pun on roller coaster, among retail investors.

In the opinion piece titled "South Korea Is Becoming Uninvestable, Too," Bloomberg argued that investors could remain bullish on the global AI boom while choosing to "stay far, far away from the KOSPI."

It said single-stock leveraged ETFs had amplified market volatility to a degree that could discourage foreign institutional investors from increasing their exposure to Korean equities, and questioned whether regulators had done enough to protect investors after approving the products.

The FSC rejected that assessment, saying the column relied on statistics whose sources could not be verified and cited figures inconsistent with official market data, including its estimate of forced liquidations.

"The market volatility since mid-June has been driven by a combination of factors, and market assessments are showing signs that investor sentiment is beginning to recover," it said in a statement.

It also pointed to tighter regulations introduced in July, saying daily trading value in single-stock leveraged ETFs had fallen to about 1.3 trillion won ($912.5 million) from more than 12 trillion won before the measures were announced.

The financial regulator further defended Korea's market fundamentals, citing solid economic growth, record-high current account surplus and improving corporate earnings driven by the AI and semiconductor sectors.