"The market is becoming difficult to invest in."
This warning about the South Korean stock market came from Bloomberg on August 3. The Financial Services Commission responded the following day, asserting that the fundamentals of the South Korean economy are solid and that "Korea is an irreplaceable investment destination."
While this statement may hold some truth considering the profit outlook and growth potential of local companies, individual investors are more concerned about whether there is a viable market for them to trust their judgment and invest in.
Unfortunately, the South Korean stock market has been far from stable over the past two months. As described by the term "roller-KOSPI," the market has been unpredictable. The KOSPI index reached an all-time high of 9,114.55 on June 22, only to plummet to 6,023.66 by July 28, marking a 34% drop in just over a month. Just three days later, on July 31, the index surged by 1,001.89 points, or 17.9%, setting records for both the largest single-day gain and percentage increase in its 46-year history. There were no wars or financial crises, yet the market experienced extreme volatility, with dramatic drops and rises occurring within days, prompting daily interventions to stabilize the situation.
What is particularly disheartening is that the causes of this volatility are closely tied to policy failures, with the burden of these failures falling heavily on individual investors. In May, the government hastily introduced single-stock leveraged exchange-traded funds (ETFs). Following severe criticism for exacerbating volatility, the government proposed corrective measures two months later, including raising the minimum deposit requirement to 30 million won and disallowing substitute securities. Lee Chan-jin, the head of the Financial Supervisory Service, even remarked that the introduction of these policies should have been prevented at all costs. However, rather than taking responsibility or apologizing for the policy decisions, the government has instead raised the barriers for individual investors. Additionally, recent controversies surrounding the reform of individual comprehensive asset management accounts (ISAs) have introduced further investment risks for individuals.
As the investment threshold rises and policy uncertainty increases, reports of record-breaking performances are emerging from the other side. Major securities firms have reported their highest earnings ever this year, driven by significant increases in trading volume. Growth in various sectors, including investment banking, wealth management, and overseas operations, has contributed to this success, but the expansion of brokerage revenues from increased domestic and international stock trading has also played a key role. Notably, the 16 types of single-stock leveraged and inverse ETFs have generated over 1 billion won in related fees for securities firms daily, despite individual accounts experiencing extreme fluctuations. The trading activity during these volatile periods has directly translated into profits for the securities firms.
As a result, individual investors have begun to respond with their actions. From August 3 to 6, there was a net outflow of 410 billion won from domestic equity ETFs, marking the first instance of capital flight this year. Even during the KOSPI's rebound from August 10 to 14, while foreign investors net purchased 6.547 trillion won, individuals sold off 7.846 trillion won. Samsung Electronics and SK Hynix were the top two stocks for foreign net purchases, but they were also the top two for individual net sales. Individuals who held on during the downturn sold their stocks during the rebound, allowing foreign investors to acquire those shares. The sentiment of many individuals has shifted to skepticism, with an increasing number of them turning their attention back to the U.S. stock market, expressing doubts about the reliability of the domestic market.
The departure of individual investors should not be dismissed as a mere shift in investment sentiment. There are approximately 14 million individual investors in South Korea, which is about one in three citizens. For many in their 20s and 30s, stocks have become a primary means of wealth accumulation, beyond just a way to invest spare cash. If these individuals lose faith in the domestic market, the implications extend beyond the losses of a few "ants" (retail investors). A decline in the trust of 14 million investors poses a significant threat to the integrity of the entire capital market.
As financial authorities assert, South Korea may indeed be an "irreplaceable investment destination." However, a market with many good companies is not the same as a market that is conducive to investment. While investors must bear the responsibility for their investment outcomes, it is the duty of the government and the market to create predictable rules and a fair investment environment. Before advising individual investors to be more cautious, it is essential to reflect on why the current South Korean stock market has become particularly challenging for them to navigate.
* This article has been translated by AI.
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