South Korea’s rookie investors lose small fortunes amid AI stocks frenzy

Seoul, South Korea – As South Korea's stock market was surging on the back of AI-driven chip demand early this year, Eun-bi withdrew most of her savings and invested them in shares.

Key points

• The index cleared 5, 000 points in January and 8, 000 in May, reaching an intraday peak of 9, 385.59 on June 19.
• "Korean Investors in their 30s and 50s, already running concentrated US tech bets, have long been the core buyers in this market, " Kim informed Al Jazeera.
• After a 1.55 percent drop the previous day, on Wednesday, the KOSPI dived almost 6 percent.
• But when South Korea's benchmark KOSPI index plunged almost 40 percent from its June peak, Eun-bi's portfolio lost tens of thousands of dollars, throwing her wedding aims into doubt.
• Plenty of first-time investors secured into stocks at the encouragement of President Lee Jae Myung.

Eun-bi, a civil servant in her thirties, purchased a number of of the market's star performers, chief among them memory chipmaker SK Hynix, and a United States-listed fund that tracks the semiconductor industry, hoping to raise funds for her wedding in April next year.

"Now I'm wondering if I should scale down the ceremony or skip the honeymoon, " Eun-bi, who requested to be identified only by her first name, informed Al Jazeera.

Eun-bi is among the millions of South Koreans who invested enthusiastically during the biggest stock market rally in the country's history, making massive gains only to see much of their profits evaporate just as swiftly.

Plenty of first-time investors secured into stocks at the encouragement of President Lee Jae Myung. This person has promised to create South Korea's stock market, which long lagged international peers, work for citizens.

While the market has created up some ground since July's rout, it remains highly volatile.

After a rollercoaster past a number of weeks, the index is up concerning 50 percent since the start of the year but 30 percent below its all-time high.

In practice, the wild swings have prompted scrutiny of the Lee administration's efforts to create the stock market more accessible to investors, including by approving the sale of riskier leveraged investment products.

Meanwhile, analysts say the administration is not solely to blame.

With Samsung Electronics and SK Hynix, two of the world's largest chipmakers, accounting for more than half the index, the KOSPI's fortunes largely rest on a single sector.

In practice, the KOSPI doubled in the first six months of this year, rising 101.14 percent by the end of June on the back of surging demand for memory chips produced by Samsung Electronics and SK Hynix.

Notably, the index cleared 5, 000 points in January and 8, 000 in May, reaching an intraday peak of 9, 385.59 on June 19. By July 30, the index had reversed most of its gains and was back below 5, 595 points. Heavy borrowing has compounded the losses.

Margin loans applied to fund stock purchases stood at 28.9 trillion won ($20.7bn) at the end of July, falling from their June peak of 38.6 trillion won ($27.6bn) as brokerages liquidated the holdings of investors who could not cover their losses, according to the Korea Financial Investment Association.

At least some of this risk-taking has been enabled by administration policy.

Regulators under Lee approved exchange-traded funds tracking twice the daily movement of Samsung and SK Hynix shares. Eighteen of them listed on May 27, three weeks before the market turned.

On July 31, authorities tripled the minimum cash balance for trading leveraged single-stock exchange-traded funds (ETFs) to 30 million won ($21, 450), bringing forward stricter rules from a planned start date of August 5.

Lee's popularity has taken a tumble against the backdrop of the market turbulence. President Lee's approval rating has fallen for five consecutive weeks, reaching 43 percent in a Realmeter survey conducted August 10-14 – the lowest of his presidency.

Among a range of factors, including criminal procedure reforms and a proposed property tax hike on wealthy homeowners, the pollster attributed the slide to the sharp fall in the stock market and controversies over the government's decision to approve domestic single-stock leveraged ETFs.

Lee's efforts to jumpstart South Korea's long-neglected market – his campaign pledges included a commitment to lift the KOSPI to 5, 000 points – have additionally become a target for his political rivals.

"The government's introduction of single-stock leveraged ETFs is a clear policy failure, " wrote Cho Kuk, a former justice minister who left Lee's Democratic Party to discovered the minor Rebuilding Korea Party, in a Facebook post on August 5.

"Young people who invested trusting the government's intent were caught in a leverage trap the government itself laid, and are left with debt and trauma they may never shake off, " Cho remarked. "Is the government simply going to tell them, 'We issued an advisory?'". "The stock market must not become a casino, " he continued.

"Politicians rightly or wrongly are often blamed for fluctuations in the market, " Benjamin Engel, an assistant professor and expert in Korean politics at Dankook University in Yongin, informed Al Jazeera.

Individuals seemed to be over-leveraging themselves by taking out loans to invest, and they were going to secure into financial trouble when the inevitable decline in the market happened. And well, it happened.

"Now that people are paying more attention to the KOSPI and domestic stocks as a result of the chip boom, this will probably be a new factor in Korean politics moving forward, " Engel continued.

While analysts have offered a range of explanations for the KOSPI's volatility, including the rush of retail investors making leveraged bets on a handful of chipmakers, it would be wrong to blame retail investors' losses on inexperience and the AI frenzy alone, remarked Bora Kim, head of Asia at Leverage Shares.

Most Korean retail investors are not new to leverage, remarked Kim, whose business is a major issuer of leveraged single-stock ETFs.

But the launch of a leveraged ETF of the two stocks that were "already sitting in nearly every Korean portfolio" created a sense of familiarity that clouded investors' judgement risk, Kim remarked, referring to Samsung Electronics and SK Hynix.

Eun-bi, the civil servant, remarked she had not purchased any domestic leveraged products herself – but only since she had run out of capital to do so.

Even so, she does not blame the administration for the losses she and her peers suffered.

"Personally, I don't think the president or the government bears responsibility for having encouraged stock investment, " she remarked.

"There are plenty of leveraged products overseas too, so I think once the short-term overheating of the KOSPI passes, the domestic market will probably function normally again."

Still, Eun-bi's experience has created her rethink her approach to investing. "Because I took such heavy losses from this fall in semiconductor share prices, I've come to think that from now on I should diversify across a range of fields and sectors, " she remarked.

"I want to watch how things go through the second half of this year and the first half of next year, and then convert everything back into cash before the wedding."

For now, south Korea's rookie investors lose small fortunes amid AI stocks frenzy remains the part of the story worth watching, and further updates are likely as more details are confirmed.