Stunning South Korea Stock Shock Triggers Circuit Breaker as Semi Names Strike FOMO

It’s a holiday-shortened week in both Hong Kong and on Wall Street, so trading is muddling along in midsummer manner.

And then there’s Korea!

South Korea’s Kospi plummeted again on Thursday, losing 7.9% on Thursday alone. The sharp selloff stems entirely from the semiconductor stocks that have made the Seoul market this year’s standout performer worldwide.

Massive Amount of Leverage

The moves are magnified by the massive amounts of leverage taken on by retail investors who have climbed into leveraged exchange-traded funds (ETFs) based on Seoul’s heavyweight stocks, memory-chip makers Samsung Electronics (KR:005930) and SK Hynix (HXSCL) (KR:000660).

Hynix is down 14.6% on Thursday alone, with Samsung off 9.1%. Investors are concerned about excess capacity. But they’re equally concerned about today’s U.S. jobs report for June, released a day early ahead of the July 3 public holiday. Hong Kong also had a holiday on Wednesday.

While economists expect moderation in U.S. job growth, and a steady unemployment rate at 4.3%, a strong report would increase the chances of a U.S. interest-rate rise. That in turn will pressure the corporate and retail-investor borrowing that are turbocharging the memory-maker rally.

Single-Stock ETF Pressure

Investors, full of “fear of missing out,” are chasing gains in those semiconductor stocks. Margin debt has risen to a record $25 billion in South Korea, much of it pumped into 16 newly listed single-stock leveraged ETFs trading in Seoul. The ETFs started trading on May 27, providing leveraged two-times exposure to Samsung Electronics and Hynix, 14 of them on the long side and two on the short side. Those single-stock ETFs now account for as much as half of the daily trading in Hynix and Samsung.

Thursday’s selloff once again triggered the circuit breaker in South Korea, where trading was halted for five minutes shortly after the open. Investors are also concerned about a report that Meta Platforms (META) is considering selling access to its computing infrastructure, suggesting it has overbuilt. Oh, and Apple (AAPL) is in talks to get clearance to buy semiconductors from Chinese chipmaker ChangXin Memory Technologies, a company that is on a Pentagon blacklist, according to the Financial Times.

Seoul-Specific Selloff

What’s remarkable about Thursday’s selloff in Seoul is how insular it is. Yes, Chinese tech stocks also sold off, with the mainland benchmark CSI 300 index down 3.0% and the ChiNext equivalent to Nasdaq down 5.7%.

But Japan stocks are flat, with the Topix eking out a 0.1% gain, despite a 2.5% fall in the Nikkei 225. The blue-chip Nikkei was sunk by the 13.5% fall in flash-memory maker Kioxia Holdings (KXIAY) (T:285A). Kioxia, formed out of the memory operations of Toshiba, has risen to become Japan’s largest company by market size since Bain Capital listed it in December 2024. Its shares remain up 571.9% this year.

My stock pick from Asia for this year, chip-testing equipment maker Advantest (ATEYY), (T:6857), also sank on Thursday, down 10.0%. But it is still showing a 36.1% year to date gain.

Even other chip stocks such as Taiwan Semiconductor Manufacturing Co. (TSM) (TW:2330) were little-moved by Thursday’s volatility. TSMC, which cares little as to which company designs the chips that it fires in its foundries, dipped just 1.6% on Thursday. That left the Taipei market little changed, the benchmark Taiex down just 0.6%.

Singapore Up, Australasia Flat

Markets in Australia and New Zealand budged little, and Southeast Asian markets generally rose slightly, Singapore ending the day up 1.1%. It’s becoming increasingly clear that memory stocks can oscillate wildly while the rest of the market gets on with business as usual.

The Kospi ended Q2 on a 101.1% year-to-date gain, after the best quarter ever for memory stocks, as I noted in my review of the first half of the year for Asian markets.

But such moves are now virtually commonplace in Korea. My previous column noted that Hynix had plunging 14.2% peak to trough on June 23, “Black Tuesday,” then rallied 13.1% the next trading day. Prior to that, we had “Black Monday” on June 8, when the Korean market plunged 8.3%.

On Thursday, we are back to that pattern: so will there be another swift rally?

Sooner or later — and it is starting to feel like sooner — this pattern will end. We will get a nasty shakeout in the semiconductor sector, perhaps along the lines of when the dot-com bubble burst.

The saving grace of the memory stocks is that their share-price gains are backed up by stellar earnings. That makes them different from the days when pets.com and Webvan soared on a wing, a premise and a promise, only to implode.

BIS Warns of Blowout

Those earnings, though, also arise out of massive spending by the artificial intelligence hyperscalers. The Bank for International Settlements (BIS) is warning that the global surge in AI plays could end in a lengthy “investment bust” if AI fails to deliver profits.

The hyperscalers have laid out plans to pump more than $1 trillion into AI-related capital expenditure over the course of this year and last, financed in part by high stock values as well as cheap corporate debt. Any pullback could cause a downward spiral of tightening financial conditions.

By coincidence, U.S. margin debt has soared 54% to a record $1.4 trillion in the figures for May – eerily similar to the hyperscaler investment. The increased use of leverage forces ETF and index-tracker providers to buy the same memory stocks that retail investors are chasing, piling pressure on a handful of equity names. Any unwinding of positions triggers a nasty reversal – as we are seeing on Thursday.

The BIS likens the investment supercycle to the dot.com bubble as well as the railway mania in Britain in the 1840s. In those instances, genuine tech breakthroughs led to capital inflows well beyond the long-term profitability prospects of the sector.

So while the BIS acknowledges the potential productivity gains from AI, it is equally concerned that the companies have not demonstrated a concerted ability to recoup their costs through earnings.

I would bet on another bounce back in Seoul and for the memory-chip stocks. It’s why I suggest that investors trade in and out of the Roundhill Memory ETF (DRAM), where just three stocks — Samsung, Hynix and Micron Technology (MU) — make up 73.0% of the exposure.

I’m not alone. DRAM has risen to become the fifth-most-active name on Wall Street, according to the Interactive Brokers list of the 25 tickers that see the highest volume of client orders. Those above and around it – Micron, SpaceX (SPCX), Nvidia (NVDA), the Direxion Daily Semiconductor Bull 3x ETF (SOXL) and SanDisk (SNDK) indicate that the over-concentration in memory and AI plays applies as much on Wall Street as it does in South Korea.

At the time of publication, McMillan was long DRAM and NVDA.