South Korea stock volatility eases as leveraged trades unwind

South Korean stocks have shown signs of calming as leveraged trades are unwinding amid regulatory constraints. Morgan Stanley estimates that the deleveraging process has progressed more than half. The most extreme phase of South Korea's stock-market turmoil may be concluding following a historic sell-off that exposed leveraged positions and regulatory measures reduced volatility in risky products.

An index of volatility in South Korean shares recently fell to a two-month low, down from a record high in June. Forced liquidations helped decrease outstanding margin debt, while tighter rules on leveraged exchange-traded funds cut trading and assets in products linked to Samsung Electronics and SK Hynix. The moves indicate that some of the leverage-driven excess that amplified sharp swings in local equities has been cleared.

The Kospi Index experienced a decline of nearly 40% from its June peak, while global funds have sold over US$100 billion of shares in 2026, leaving emerging-market funds underweight. However, overseas money managers are not rushing back in, as volatility remains elevated. Investors are weighing historically cheap valuations and strong earnings outlook against the risk of further sharp swings.

Isaac Thong, a senior investment director, noted that while the market appears attractive, high volatility remains a concern. The exchange's 20-minute trading halt was activated four times in July, with the Kospi rising or falling by at least 5% on nearly half of trading days. Authorities have introduced measures to curb demand for leveraged products, including a higher cash deposit requirement for single-stock leveraged ETFs.

The stock slump and tighter regulations have forced out many retail investors, with about 1 trillion won of their accounts facing forced liquidation in June and July. Despite the sell-off, South Korean stocks appear cheap by some measures, trading at a record-low 5.1 times their 12-month forward earnings. However, this has not enticed money managers to return quickly, as extreme volatility continues to deter aggressive investment.