The Kospi Index has plunged this year, moving from a record high of 9,410 in June to the current 5,817. This retreat has made it one of the worst-performing global indices.
Similarly, the iShares MSCI South Korea ETF (EWY) has dived to $144.2 from the year-to-date high of $217. This article highlights the four reasons why the Kospi and EWY ETF have plunged.
Kospi Index has dropped as Samsung Electronics and SK Hynix fell
The main reason why the Kospi Composite Index has fallen sharply is that its two biggest constituent companies have plunged amid the ongoing rotation from memory stocks.
Samsung Electronics stock has fallen from 374,000 won to 223,500 won today. Similarly, SK Hynix has dropped from 2.98 million won to 1.42 million today.
This retreat has coincided with the sell-off in the memory industry, with other top companies like Micron, SanDisk, and Western Digital being in free fall. The Roundhill Memory ETF (DRAM), which tracks the biggest companies in the industry, has fallen by 43% from its all-time high.
Memory and semiconductor stocks have pulled back as investors take profits after a strong rally. In addition, many of these companies had surged by triple digits from their lows last year, making them particularly vulnerable to profit-taking.
Samsung and SK Hynix account for over 50% of the Kospi Index, making their performance sensitive to its performance.
In line with this, foreign investors have been selling their South Korean stocks. A report by Goldman Sachs showed that these foreigners sold stocks worth over $62 billion as of late May, a trend that has continued.
In the United States, demand for the EWY ETF has faded, with its inflows on Tuesday falling to $32 million from last week’s high of $451 million.
Deleveraging has had an impact in the sell-off
Another reason behind the sell-off is deleveraging among South Korean investors, who borrowed heavily to invest when it was in an uptrend.
In particular, these investors have focused heavily on single-stock leveraged ETFs, which were introduced in May. A recent report by KB Financial showed that investors bought assets worth over 14 trillion won or $9.7 billion, compared with foreign investors who bought 2 trillion won.
South Korea has since then banned these ETFs, with the finance minister apologizing to investors who have lost a fortune in this period. In most cases, leveraged assets tend to underperform the market more when there is an intense sell-off.
US-Iran war and the rising fuel prices
Geopolitics have contributed to the ongoing Kospi and EWY ETF crash this month. The US and Iran have resumed their kinetic activity, which has pushed crude oil prices higher this week. Brent and the West Texas Intermediate (WTI) benchmarks jumped to $87 and $84.
South Korea is highly sensitive to the happenings in the Middle East since it imports substantial amounts of energy from the region. As a result, there is a risk that inflation will continue rising, pushing the central bank to deliver another rate hike.
Technicals explain why the Kospi is falling
Kospi Index chart | Source: TradingView
Several technical concepts also explain why the Kospi Index is falling. As we wrote here, the decline is because of the Wyckoff Theory. For a long time, the index was in a tight range, a sign that it was in an accumulation stage. It then moved to the markup stage, which pushed it to a record high. Now, there are signs that it has moved to the markdown stage, which is characterized by heavy selling.
At the same time, the Kospi Index is falling after it became highly overbought, with the Relative Strength Index rising to the extreme overbought zone of 83.95 in May this year. It is common for highly overbought assets to retreat as investors book profits.
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