Korean Newbie Investors Hit Hard in AI Stock Craze

Seoul, South Korea – When South Korea's stock market rallied sharply earlier this year on AI chip demand, Eun-bi, a civil servant in her 30s, withdrew most of her savings to buy stocks. She bet on several high-profile issues, especially memory chip maker SK Hynix and a U.S.-listed ETF tracking the semiconductor industry, hoping to fund her wedding next April.

But as the benchmark KOSPI tumbled nearly 40% from its June peak, Eun-bi's portfolio lost tens of thousands of dollars, putting her wedding plans at risk. “Now I’m debating whether to scale down the ceremony or skip the honeymoon,” Eun-bi, who asked to be identified only by her first name, told Al Jazeera.

Eun-bi is one of millions of South Koreans who enthusiastically entered the market during the country's biggest stock boom in history, reaping big gains but quickly watching profits evaporate.

Many first-time investors were encouraged by President Lee Jae Myung, who pledged to make the stock market—long lagging international peers—serve the people's interests. Although the market has partially recovered from the July crash, volatility remains intense. On August 19, the KOSPI fell nearly 6% after dropping 1.55% the previous day. After weeks of dizzying swings, the index is still up about 50% year-to-date but about 30% below its all-time high.

Causes and Consequences

The violent swings raise questions about the Lee administration's efforts to broaden market access for investors, including approving risky leveraged investment products. However, analysts say the government is not the only factor. With Samsung Electronics and SK Hynix—the world's two largest chipmakers—accounting for more than half of the index, the KOSPI's fate is largely tied to a single industry.

The KOSPI doubled in the first half of the year, gaining 101.14% by the end of June, driven by surging memory chip demand. The index crossed the 5,000-point mark in January, reached 8,000 in May, and hit an intraday peak of 9,385.59 on June 19. But by July 30, the index had reversed course, slipping below 5,595 points. Borrowing to invest has compounded losses.

According to the Korea Financial Investment Association, margin loan balances stood at 28.9 trillion won ($20.7 billion) at the end of July, down from a peak of 38.6 trillion won ($27.6 billion) in June, as brokerages liquidated assets of investors unable to cover losses.

Government policy is seen as having contributed to some of this risk. Regulators under Lee approved ETFs that track twice the daily movement of Samsung and SK Hynix shares. Eighteen such funds were listed on May 27, three weeks before the market reversed. On July 31, authorities tripled the minimum cash requirement for trading single-stock leveraged ETFs to 30 million won ($21,450), accelerating a plan originally scheduled for August.

Political Controversy

The market turmoil has affected President Lee's approval ratings. A Realmeter survey from August 10-14 showed his approval fell for a fifth consecutive week to 43%—the lowest since he took office. Analysts attribute the decline to both the stock market slump and the controversy over approving domestic single-stock leveraged ETFs.

Cho Kuk, a former justice minister who left the Democratic Party to found the minor Rebuilding Korea Party, criticized: “The government's introduction of single-stock leveraged ETFs is a clear policy failure. Young people who trusted the government's guidance were trapped by the leverage the government set up, saddled with debt and psychological damage that's hard to escape. The stock market should not become a casino.”

Benjamin Engel, an assistant professor of Korean politics at Dankook University, noted: “Politicians, rightly or wrongly, often get blamed for market movements. People appear to have over-borrowed to invest and will face trouble when the inevitable market decline hits. Now that investors are more attuned to the KOSPI, this will be a new factor in Korean politics going forward.”

Bora Kim, Asia regional director at Leverage Shares, a major issuer of leveraged ETFs, argued it's unfair to blame solely retail investors' inexperience or the AI hype. “Korean investors in their 30s and 50s, who have long bet big on U.S. tech, have always been a dominant buying group in this market. The launch of leveraged ETFs on two stocks that are in nearly every Korean investor's portfolio created a sense of familiarity that overshadowed risk awareness,” Kim said, referring to Samsung and SK Hynix.

Eun-bi said she didn't buy any domestic leveraged products simply because she ran out of cash. Still, she doesn't blame the government for her losses. “I don't think the president or the government should be held responsible for encouraging stock investment. Leveraged products are widely available abroad, so I think after the short-term overheating of the KOSPI, the market will return to normal.”

After the costly experience, Eun-bi is changing her approach: “Because I lost a lot from the drop in semiconductor stocks, I've thought that from now on I should diversify across sectors. I want to watch the situation in the second half of this year and the first half of next, then move everything to cash before the wedding.”