Up until mid-year, the South Korean stock market was on a positive trajectory, but it recently experienced a significant crash due to economic fears stemming from the United States.
On Aug. 5, South Korea’s major market index, the KOSPI, recorded a “Black Monday,” closing at 2441.55, down 234.64 points (8.77%) from the previous session. The KOSPI index even briefly fell below the 2400 mark during trading.
The KOSDAQ index, which is Korea’s secondary stock market, also closed sharply lower, falling 88.05 points (11.30%) to 691.28. As both indices plummeted, the exchange activated sidecars (a temporary halt on program sell orders) and circuit breakers (a temporary halt in trading) to stabilize the market, but these measures were insufficient to stop the market’s freefall.
Until mid-July, there was no anticipation of panic selling in the market; rather, there was widespread optimism that market conditions would improve. Many believed that if the U.S. Federal Reserve (Fed) initiated a rate cut in the second half of the year, all risks surrounding the market would dissipate. Anticipation of the upcoming rate cut pushed the KOSPI index to its yearly high of 2891.35 on July. 11.
However, the market situation changed rapidly. A series of political events in the United States, including former President Donald Trump being shot in the ear during his speech and President Joe Biden withdrawing from the presidential race, led to a correction in tech stocks.
Additionally, growing skepticism about the return on investment (ROI) from AI-related ventures increased volatility in major big tech stocks. Meanwhile, escalating tensions in the Middle East further dampened investor confidence.
Although the Federal Open Market Committee (FOMC) meeting in late July temporarily lifted the stock market when Fed Chairman Jerome Powell hinted at a possible rate cut in September, this optimism was short-lived.
The reason for this is that the Bank of Japan’s rate hike raised concerns about the unwinding of yen carry trades, and weak U.S. economic indicators, including a decline in the July manufacturing PMI and poor employment data, intensified recession fears.
As major negative factors rapidly piled up over a short period, it culminated in what has been described as “one of the worst crashes in history” on Aug. 5, shaking the Korean stock market. Hopes for a rate cut disappeared, and fears of a U.S.-led economic downturn took hold. Even Samsung Electronics, which had posted a second-quarter earnings surprise, plummeted by more than 10% due to recession fears.
Cho Byung-hyun, a researcher at Daol Investment & Securities, said, “Though there are different issues involved, the main concerns are that the Fed is reacting too slowly with its monetary policy and that an economic recession seems unavoidable. Even if a recession doesn’t happen immediately, worries about the economy are growing in the market.”
Market experts believe that the trend of forced selling (margin calls) will continue in the Korean market for a certain period of time. This means the domestic stock market on Aug. 6 is expected to experience further forced selling (margin calls) today, following the previous day’s steep decline.
Margin calls occur when an investor who borrowed money from a brokerage to buy stocks cannot maintain the required collateral ratio due to a sharp drop in stock prices, leading the brokerage to forcibly sell the investor’s stocks.
In the Korean stock market, where “margin buying (investing with borrowed money)” has become one of the trends, margin calls can be devastating for individual investors. This forced selling can lead to further declines in the index, creating a vicious cycle of more margin calls. Margin trading has been on the rise this year. On the first trading day of January, the balance of margin loans was 17.5 trillion won ($12.7 billion) and by Aug. 1, it had increased by $1.4 billion to $14.2 billion.
Baek Jee-yoon, CEO of Blash Asset Management, said, “Given the significant drop in the index on Aug. 5, additional margin call selling may occur the following day. Ultimately, the key to market recovery will be when new buyers step in to purchase at the low points.”