The South Korean stock market slid from record highs to a sharp selloff, with the benchmark Kospi falling as much as 10% on Tuesday. The decline came as investors rushed to sell chip stocks due to fears of excessive speculation. After hitting a record high a day earlier, the Kospi closed at 8,203.84, down 910.71 points or 9.99%. It was led by heavyweight chipmakers Samsung Electronics and SK Hynix, both falling more than 12%, causing a market-wide trading halt for 20 minutes.The decline is a major blow to a market that has been one of the world’s strongest performers this year. The Kospi crossed the 9,100-mark for the first time on Monday, led mainly by gains in Samsung Electronics and SK Hynix, which now account for more than half of the index’s total market capitalization.The slide gained momentum as foreign investors sold more than 4 trillion won ($2.6 billion) worth of Kospi shares by midday. However, retail investors moved in the opposite direction, buying shares as prices fell. Market participants pointed to growing unease over the pace of gains in chip-related stocks and the growing role of leveraged investment products in driving volatility.“Volatility is overblown. (Such volatility) cannot be explained without heavy retail participation,” CLSA chief equity strategist Alexander Redman told Reuters. “What worries me is that retailers are in the driving seat, as they use a lot of margin, even though the ratio of market capitalization is small. What is even more worrying is that regulators have now allowed leveraged single security ETFs, which is adding fuel to the fire.“South Korean regulators also recently warned investors about the risks of borrowing to invest, after margin loans hit a record high in June. The market fell after an extraordinary rally in technology stocks. SK Hynix had posted gains for eight consecutive trading sessions, pushing its year-to-date gain to nearly 350% and overtaking Samsung Electronics earlier this week.Despite Tuesday’s decline, the Kospi remains up 94.67% this year. Over the same period, the South Korean won has weakened 6.5% against the US dollar. In fixed income markets, September futures on three-year Treasury bonds rose 0.14 points to 103.01. The yield on the most actively traded three-year Korean Treasury bond fell 3.1 basis points to 3.772%, while the benchmark 10-year yield fell 1.8 basis points to 4.179%.Investors were also keeping an eye on developments in the United States, where expectations of tighter monetary policy have strengthened. Fed funds futures currently give a 75% chance of a rate hike by September, while BofA Global Research and Deutsche Bank have revised their forecasts and now expect a hike before the end of the year.
