South Korean stock market crashes; more falls seen ahead

The South Korean stock market was one of the worst victims of panic selling by investors fearing further negative US economic news on Monday, with the main Kospi index breaking below 2,500 on a nearly 9% fall, which activated a circuit breaker for the first time in more than four years.  

Pessimistic views betting on stocks' longer downward spiral are seemingly beating out market recommendations to buy the dip.

Korea’s benchmark Kospi index dove 8.8%, or 234.64 points, to close at 2,441.55 on Monday as investors extended their panic selling spree from Friday. The junior Kosdaq index plummeted 11.3% to end at 691.28.  

This was Kospi's biggest point loss in its history. In percentage terms, it was the fifth-largest fall since October 2008, in the wake of the global financial crisis.  

In late afternoon, the Korea Exchange issued a circuit breaker to suspend both Kosdaq and Kospi trading for 20 minutes after both fell more than 8%. This was the eighth circuit breaker in the history of the Kospi and the first one for both the Kospi and the Kosdaq since March 2020 at the height of the COVID-19 pandemic.

A circuit breaker is activated when the Kospi or Kosdaq drops more than 8% and maintains that decline for at least one minute.  

Earlier in the morning, a sidecar trading halt also took effect on the Kospi 200 Futures index for five minutes as Korean stocks tumbled. A sidecar is activated to prevent panic when the Kospi 200 Futures index rises or falls more than 5% and maintains that gain or loss for at least one minute.

Market analysts attributed today’s market rout to growing fears over deeper troubles in the US economy given the country’s fast-cooling labor market and a slowdown in manufacturing activity. 

Investors are also bracing for wider conflict in the Middle East as Iran is said to be weighing a counterattack on Israel following the latter’s assassinations of two senior militant leaders last week.

MORE FALLS AHEAD

Market analysts warned of more falls in upcoming months after the global stock market enjoyed a long heyday on the strong US economy and an artificial intelligence boom.

“We think the stock market trend is reversed. When the Kospi hit 2,900, that was its peak. It is now on a downward trend,” said Chung Yong-taek, a senior analyst at IBK Securities Co.

He, however, believed the latest panic selling is anomalous and expected technical rebounds in mid-August and after a possible big step by the US Federal Reserve in September.

IBK Securities forecasts the current downtrend to continue through the rest of this year, and the Kospi index will move between 2,400 and 2,900.

The growth concern took a heavy toll on Korea’s mainstay export companies namely Samsung Electronics Co., SK Hynix Inc. and Hyundai Motor Co.

Especially, the country’s two chip heavyweights took a big hit from the latest panic selling after investors gobbled up their shares over a year on expectations of a rise in demand for high-bandwidth memory chips on the AI boom.

SOLID AI DEMAND

Market bellwether Samsung Electronics plummeted 10.3% to 71,400 won ($52.03) on Monday, and its crosstown HBM leader SK Hynix dove 9.9% to 156,100 won.

But some analysts suggest investors buy the dip on these stocks, saying the latest losses are too excessive.

“For the short term, the (Korean) chip stocks’ move will hinge on Nvidia’s earnings announcement in August. Nvidia’s earnings are expected to meet market estimates but it could give shocking guidance that could shake the market,” said Kim Dong-won, the head of KB Securities Co.’s research center.

“Bad news just happened all at once (about Nvidia). There is no sign of a stagnation in AI demand so I think there is limited downward risk in local chip stock ... Considering the global financial meltdown (in 2008), today’s fall cannot be justified.”

Most analysts forecast the Korean stock market will remain highly volatile for a while. 

About 99% of stocks listed on the Kospi fell on Monday, including nearly all blue-chip stocks across the board.

Hyundai Motor shares lost 8.2% to end at 224,000 won; LG Energy Solution Ltd. dropped 4.2% to 322,000 won; Celltrion Inc. lost 5.7% to 182,500 won, KB Financial Group Inc. declined 7.7% to 76,800 won; POSCO Holdings Inc. decreased 11.8% to 314,500 won; and HD Hyundai Heavy Industries Co. plunged 11% to 186,000 won.

Foreign investors net sold 1.5 trillion won worth of Kospi-listed stocks on Monday, and institutional investors dumped 268.5 billion won. Retail investors net purchased 1.7 trillion won worth of Kospi stocks.

Together the Korean stock markets -- the Kospi and Kosdaq -- lost about 235 trillion won in market capitalization on the day.

Korea’s Finance Minister Choi Sang-mok said on Monday the government will stay on high alert and monitor the financial market for 24 hours amid the growing volatility in the global financial market due to concerns over the US economic slowdown and geopolitical risks in the Middle East.

“If necessary, the government will promptly respond according to a contingency plan in close partnership” with related agencies, said Choi.

Write to Sung-Mi Shim and Jin-gyu Kang at smshim@hankyung.com
             


Sookyung Seo edited this article.