By Gregor Stuart Hunter, Rae Wee and Jihoon Lee
SINGAPORE/SEOUL, July 29 (Reuters) - South Korean stocks plunged for a second straight session on Wednesday as Asia's once-blazing AI rally morphed into a brutal market reckoning, wiping as much as $2.18 trillion from Seoul’s equity market and leaving leveraged retail investors reeling.
The benchmark KOSPI index dived as much as 12.6% before reversing some losses to close down 6%, extending Tuesday’s near-11% rout and putting the market on course for its
steepest monthly decline on record. The slide has erased almost 40% of the index's value from a peak reached little more than a month ago.
Volumes were light, suggesting buyers have evaporated from what just weeks ago was the hottest trade in global markets — buying the chipmakers raking in cash from AI investment.
Much of that buying was done by small-time investors using borrowed money to increase their exposure, and that dynamic, which accelerated the rally, is exacerbating the selloff as brokers forcibly shut down losing positions.
Under pressure from lawmakers during a parliamentary session, Finance Minister Koo Yun-cheol apologised for the introduction of single-stock leveraged ETFs, saying they had not been considered carefully enough. He added that the government is reviewing market stabilisation measures, including adjusting regulation related to the funds, which some analysts have blamed for increasing the amount of leveraged trading in the Seoul bourse.
"It's certainly a very crowded trade which is being unwound," said Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong.
"If you look at what is falling in the market, it has been the stocks in which you have the most leverage," he said. "It's very difficult to say when will this selloff end, but at the moment, it's definitely not the trade where we want to be."
Even blockbuster earnings from SK Hynix, which reported a six-fold jump in profit, failed to stem the panic as the results lagged lofty expectations. The chipmaker's shares slumped nearly 20% before recovering some ground, closing down 9.6%, while Samsung Electronics fell as much as 14% before trimming losses to 5.2%.
Together, the two chip giants account for more than half of the KOSPI’s market value and have exerted substantial influence over the market this year as traders seek a slice of the lucrative AI trade amid a shortage of advanced memory chips.
Shares in Taiwan's TSMC, the world's biggest contract chipmaker, fell 3.5% in Taipei.
"Hopes of the market rebounding today after a 10% plunge yesterday faded, triggering panic selling and forcing most stock investors to book losses," said Han Ji-young, an analyst at Kiwoom Securities. "Doubts are prevalent in the market that the current index level would not be the bottom."
Despite the tumble, the KOSPI is up 41.5% in U.S. dollar terms year-to-date, making it the best-performing major market this year.
"Today's price action suggests that the leverage within Korean equities remains high and a further unwind could be expected," said Asia-Pacific macro strategist Wee Khoon Chong at BNY in Hong Kong.
($1 = 1,451.9000 won)
(Reporting by Gregor Stuart Hunter and Ankur Banerjee; Editing by Christopher Cushing, Subhranshu Sahu and Shri Navaratnam)
