Reasons for the South Korean Stock Market's Sharp Decline: High Oil Prices, Semiconductor Weakness, and Exhausted Retail Investors

Most Energy Imports, Cost Burden
Manufacturing of Intermediate Goods Focused, Stock Market Impact
Weakness in Semiconductor Industry with High Dependence
Deterioration of Individual Buying Sentiment Also Acts as Negative Factor
Debt Investment Scale Lowest in 5 Months

[Asia Economy Reporters Song Hwajeong and Lee Minwoo] Amid global stock markets recently showing simultaneous weakness due to inflation concerns stemming from rising international oil and commodity prices, the domestic stock market has fallen even more sharply. This is attributed to a structure vulnerable to rising oil prices, the weakness of semiconductors on which the market heavily depends, and the weakening of individual investors' buying power that has supported the market so far. Although a technical rebound is expected due to the recent sharp decline, the high level of uncertainty makes a trend reversal to an upward trajectory unlikely.

Why Is the Korean Stock Market Falling More?

According to the 'September Import and Export Price Index' announced by the Bank of Korea on the 14th, the September import price index (provisional figure based on KRW, 2015 level 100) rose 2.4% to 124.58 from 121.61 in August. This is the highest level since February 2014 (124.60). The sharp rise in oil prices has driven up import prices. On the 11th (local time), the price of November West Texas Intermediate (WTI) crude oil on the New York Mercantile Exchange closed at $80.52, up 1.5% from the previous day, breaking the $80 mark for the first time in seven years since October 31, 2014.

Choi Yujun, a researcher at Shinhan Financial Investment, analyzed, "Currently, oil prices affect stocks in two ways: through rising discount rates and increased cost burdens. High oil prices act as inflationary pressure, raising the burden of discount rates due to interest rate hikes, and since most energy is imported, the cost burden on companies increases, which is an unfavorable factor for the domestic stock market centered on intermediate goods manufacturing."

The weakness of semiconductors, which the domestic stock market heavily depends on, is also a major factor in the market's decline. Samsung Electronics recently fell below the 70,000 KRW level, and SK Hynix has dropped below 100,000 KRW this month. According to Meritz Securities, while the KOSPI fell 12% from its peak, Samsung Electronics and SK Hynix plunged more than 28%. Lee Jinwoo, a researcher at Meritz Securities, said, "The reason the market feels particularly weak is largely due to the poor performance of leading semiconductor companies. This is because of their high market influence, but also because their underperformance relative to the KOSPI has been prolonged."

The buying power of individual investors, which has supported the market so far, is weakening. From the beginning of this month until the day before, individuals net purchased 1.6618 trillion KRW in the KOSPI. In the same period last month, they bought 2.2791 trillion KRW, and in August, 5.9164 trillion KRW. Roh Donggil, a researcher at Shinhan Financial Investment, explained, "The weakening of individual net buying is due to the burden of margin loan liquidation caused by increased volatility in individual stocks. The ratio of forced liquidation to unpaid margin loans in the domestic stock market rose from 9.2% on the 30th of last month to 11.3% on the 6th. Considering that many sell stocks in advance before forced liquidation occurs, the pressure to reduce margin loan balances due to increased volatility in individual stocks was likely even greater."

Margin Trading Also Drops Sharply

The scale of 'margin trading'?borrowing money from securities firms to invest?has hit its lowest level in five months. Due to regulatory pressure and the impact of forced liquidation from the market decline, about 3 trillion KRW was reduced in just one month.

According to the Korea Financial Investment Association on the 14th, as of the 12th, the balance of margin loans was 22.8069 trillion KRW, the lowest since May 10, when it was 22.7818 trillion KRW. The balance had steadily increased for about four months, reaching a record high of 25.654 trillion KRW on the 13th of last month, but recently decreased by about 3 trillion KRW in one month.

With the recent sharp drop in the KOSPI, forced liquidations surged, dampening investor sentiment. Forced liquidation refers to securities firms forcibly selling stocks purchased with borrowed money when investors fail to repay within the set deadline. According to the Korea Financial Investment Association, the actual amount of forced liquidation compared to unpaid margin loans totaled 3.991 trillion KRW through the 12th of this year. This already exceeds last year's total of 3.9212 trillion KRW by about 70 billion KRW. It also surpasses the 3.5042 trillion KRW during the 2008 financial crisis by about 500 billion KRW.

The financial authorities' policy to tighten margin trading also appears to have had an effect. On the 27th of last month, the Financial Supervisory Service issued consumer warnings and held meetings with risk officers (CROs) of securities firms, urging restraint in margin trading and limits on credit extensions. Since then, the margin loan balance, which had been maintained at around 25 trillion KRW, began to decline rapidly. On the 8th, it decreased by 607.1 billion KRW in a single day, the largest daily drop this year.

Ha Inhwan, a researcher at KB Securities, explained, "Recently, the won has weakened against the dollar, foreign investors have expanded their selling, and the financial authorities' orders to manage credit extension limits have overlapped, affecting individual supply and demand. Individual investors seem to have feared that there would be no improvement in supply and demand in the future, given the environment where additional margin trading could be restricted and the stock market correction has appeared."

Technical Rebound Possible

Although overall conditions are difficult, a technical rebound seems possible due to the recent sharp decline. As of 10:20 a.m. on the day, the KOSPI rose 35.19 points (1.2%) from the previous day to 2,979.60, continuing its gains for the second day.

Lee Kyungmin, a researcher at Daishin Securities, said, "A technical rebound is possible, but with the prolonged global supply chain bottlenecks leading to increased inflationary pressure and visible economic instability, a trend reversal is difficult to expect. The technical rebound should be used as an opportunity to strengthen risk management." Researcher Choi Yujun added, "Unless there is a sharp downward revision of earnings in the future, the possibility of a sharp drop at the current price level is low."

This content was produced with the assistance of AI translation services.