What a wild week it has been for South Korea’s stock market. At one point on Wednesday, the losses stacked on top of the declines in the past six weeks to erase nearly all the gains from the rally since April to June. But after plenty of outcry and a rebound in Wall Street sentiment to boost, we’re seeing tech shares recover strongly to end the week. The KOSPI is now up 17% today and poised to nearly wipe out all the losses from this week, down just a little over 1% on the week now.
Samsung is up some 25% today with SK Hynix bordering on 30% gains on the day. These two shares alone account for a little more than half of the KOSPI. And they are the two big names that have led to the predicament we’re seeing this week.
[KOSPI index daily chart]
The sheer volume of bets riding on the AI trade, and specifically these two names, are the root of the problem. That especially with the fact that the government has actively encouraged retail participation over the years.
But with that, comes big responsibility to manage the situation. And when you nudge households to pile on this much capital and margin into the market, you’re asking for trouble when things do get really intense in markets. It’s easy when the market continues to surge higher and everyone’s happy, but no market ever moves in a straight line. And that’s the problem.
There will always be times of market corrections and the main thing is to never allow these to turn into liquidity events. And I reckon that is where the government is struggling to draw a line here.
With how much they have allowed for retail investors/traders/gamblers to pile into the stock market, they risk incurring a political backlash if people lose too much money. But in markets, that is always bound to happen. Remember, this is a zero sum game. So, someone has to be the one losing.
The issue is that households are not used to or accustomed to these sort of dealings. And when losses become too big, there is a massive outcry for the government to help.
And therein lies another set of risks for the government. If they do step in to stabilise liquidity and “restore confidence”, it risks distorting market signals and fundamentals. And in the case of re-implementing a short-selling ban, it would highly damage foreign investor confidence once again. Not only that, all of which also does not address the underlying problem.
That being allowing this debt/margin loan monster to become what it is today. Something has to be done, and it has to be a different approach other than what they have been doing in the past two years.
Otherwise when the next hit comes, it is going to be even bigger and uglier than what we’re seeing in the last six weeks.
This article was written by Justin Low at investinglive.com.
