(Bloomberg) — South Korea’s $4.9 trillion stock market is starting to flash signs of strain after a world-beating rally.
The Kospi has surged 105% this year. Yet, when the benchmark hit a record on Tuesday, only 2.6% of stocks reached 52‑week highs while 31% slid to 52‑week lows. This shows how gains are concentrated in Samsung Electronics Co., SK Hynix Inc. and a few other heavyweights.
Retail participation is also losing some steam, while surging margin loans face the risk of a Bank of Korea rate hike in July. With risks piling up, investors warn any downturn may accelerate as quickly as the rally. The rise of leveraged exchange-traded funds, designed to magnify daily moves, may further intensify a reversal, they say.
“For now, I am more concerned about signs of overheating in market positioning than a deterioration in fundamentals,” said Ha SeokKeun, chief investment officer at Eugene Asset Management in Seoul. “I expect a period of increased volatility and consolidation over the next one to two months.”
Market breadth is the central worry. Samsung Electronics and SK Hynix, enjoying AI-driven chip demand, account for 54% of the Kospi’s market weight and roughly half of the gauge’s average daily turnover in May, according to Korea Exchange data. Nearly three-quarters of its gains this year have come from the two firms.
Single‑stock leveraged ETFs tied to Samsung and SK Hynix are adding to concerns. The four most popular single-stock ETFs accounted for 21% of the total ETF turnover in South Korea in their first five sessions after launching May 27, exchange data show.
“The current market structure is vulnerable to a downturn as it’s dominated by the short gamma in the leveraged ETFs,” said Kenny Kim, chief executive officer at Meridian One Asset Management. “The setup requires investors to chase rallies with heavy buying when the market rises, but forces them to dump shares when the market falls.”
Retail investors, once key drivers, are showing less willingness to commit fresh cash. Brokerage deposits fell to 121 trillion won ($79 billion) by May 22 from 137 trillion won on May 12, according to the Korea Financial Investment Association.
Meanwhile, margin balance hit a record 38 trillion won on May 29, up from 27.3 trillion won at end-2025, KFIA data show.
Rising margin loans alone may indicate heightened interest. But the increase, while investor deposits fall, may point to more leverage stress without fresh appetite to take on risk, according to Shawn Oh, an equity sales trader at NH Investment & Securities. “The signal is clear: the cash buffer eroding while active leverage refuses to unwind,” he added.
Still, optimism dominates in Korea. Appetite for AI-related stocks remains strong, and Wall Street banks remain upbeat on chip earnings. Just this week, Goldman Sachs Group Inc. raised its Kospi target to 12,000 from 9,000.
“The market breadth is indeed narrow, but that will not necessarily stop the benchmark from hitting 10,000,” said Jonathan Pines, head of Asia ex-Japan equities at Federated Hermes.
Another test looms next month, when the central bank is widely expected to raise interest rates. That could dampen liquidity, said Seo Sang-Young, a strategist at Mirae Asset Securities.
“The market is sensitive to bond yields because investments are driven by borrowed money,” Seo said.
–With assistance from Sangmi Cha.
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