Recently introduced single-stock leveraged exchange-traded products (ETFs) are contributing to heightened volatility in Korea's stock market, experts said.
Hwang Sun-oh, deputy governor of the Financial Supervisory Service (FSS), held an emergency market expert roundtable at the agency's headquarters in Yeouido, Seoul, on Tuesday to review recent market volatility and key risk factors. The roundtable was attended by two market experts from foreign investment banks (IBs), two market experts from domestic securities firms and asset managers, and one official from the Korea Capital Market Institute.
The experts at the roundtable noted that "since the introduction of 'single-stock leverage products' on the 27th of last month, market volatility has remained high due to retail investors' speculative trading tendencies." They pointed out that "concentrated investment in a small number of stocks combined with leverage has a vulnerable structure that fails to absorb shocks when the market is shaken, instead maximizing investment losses for individuals."
They further assessed that "increased volatility in exchange rates and interest rates can have a direct impact on the capital flows of foreign investors who have entered the domestic capital market." They added, "Since the resulting volatility in capital inflows and outflows can spread to supply-demand imbalances in the stock market, close monitoring is necessary."
However, the experts drew a line against the interpretation that foreign investors are exiting the domestic capital market. They explained that "long-term funds such as passive funds, based on the strengthened standing of the domestic economy, continue to flow in," adding that "(the recent expansion of foreign investors' selling of domestic stocks) is a temporary profit-taking process following a short-term surge."
Based on the experts' assessment, the FSS plans to further strengthen its standing review system for domestic and international risk factors in response to heightened market volatility. Deputy Governor Hwang said, "Investors should refrain from behavior such as overreacting to temporary turbulence by relying on high-risk products or carrying out excessive leveraged investment." He added, "Based on trust in the fundamentals of the domestic economy, I urge long-term and diversified investment within the range of economic capacity that one can bear."
