South Korea’s rookie investors lose small fortunes amid AI stocks frenzy

Seoul, South Korea – As South Korea’s stock market was surging on the back of AI-driven chip demand early this year, Eun-bi withdrew most of her savings and invested them in shares.

Eun-bi, a civil servant in her thirties, bought several of the market’s star performers, chief among them memory chipmaker SK Hynix, and a United States-listed fund that tracks the semiconductor industry, hoping to raise funds for her wedding in April next year.

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But when South Korea’s benchmark KOSPI index plunged nearly 40 percent from its June peak, Eun-bi’s portfolio lost tens of thousands of dollars, throwing her wedding plans into doubt.

“Now I’m wondering if I should scale down the ceremony or skip the honeymoon,” Eun-bi, who requested to be identified only by her first name, told Al Jazeera.

Eun-bi is among the millions of South Koreans who invested enthusiastically during the biggest stock market rally in the country’s history, making huge gains only to see much of their profits evaporate just as quickly.

Many first-time investors got into stocks at the encouragement of President Lee Jae Myung, who has promised to make South Korea’s stock market, which long lagged international peers, work for citizens.

While the market has made up some ground since July’s rout, it remains highly volatile.

On Wednesday, the KOSPI dived nearly 6 percent, following a 1.55 percent drop the previous day.

After a rollercoaster past several weeks, the index is up about 50 percent since the start of the year but 30 percent below its all-time high.

The wild swings have prompted scrutiny of the Lee administration’s efforts to make the stock market more accessible to investors, including by approving the sale of riskier leveraged investment products.

At the same time, analysts say the government is not solely to blame.

With Samsung Electronics and SK Hynix, two of the world’s largest chipmakers, accounting for more than half the index, the KOSPI’s fortunes largely rest on a single sector.

The KOSPI doubled in the first six months of this year, rising 101.14 percent by the end of June on the back of surging demand for memory chips produced by Samsung Electronics and SK Hynix.

The index cleared 5,000 points in January and 8,000 in May, reaching an intraday peak of 9,385.59 on June 19. By July 30, the index had reversed most of its gains and was back below 5,595 points. Heavy borrowing has compounded the losses.

Margin loans used to fund stock purchases stood at 28.9 trillion won ($20.7bn) at the end of July, falling from their June peak of 38.6 trillion won ($27.6bn) as brokerages liquidated the holdings of investors who could not cover their losses, according to the Korea Financial Investment Association.

At least some of this risk-taking has been enabled by government policy.

Regulators under Lee approved exchange-traded funds tracking twice the daily movement of Samsung and SK Hynix shares. Eighteen of them listed on May 27, three weeks before the market turned.

On July 31, authorities tripled the minimum cash balance for trading leveraged single-stock exchange-traded funds (ETFs) to 30 million won ($21,450), bringing forward stricter rules from a planned start date of August 5.

Political fallout

Lee’s popularity has taken a tumble amid the market turbulence. President Lee’s approval rating has fallen for five consecutive weeks, reaching 43 percent in a Realmeter survey conducted August 10-14 – the lowest of his presidency.

Among a range of factors, including criminal procedure reforms and a proposed property tax hike on wealthy homeowners, the pollster attributed the slide to the sharp fall in the stock market and controversies over the government’s decision to approve domestic single-stock leveraged ETFs.

Lee’s efforts to jumpstart South Korea’s long-neglected market – his campaign pledges included a commitment to lift the KOSPI to 5,000 points – have also become a target for his political rivals.

“The government’s introduction of single-stock leveraged ETFs is a clear policy failure,” wrote Cho Kuk, a former justice minister who left Lee’s Democratic Party to found the minor Rebuilding Korea Party, in a Facebook post on August 5.

“Young people who invested trusting the government’s intent were caught in a leverage trap the government itself laid, and are left with debt and trauma they may never shake off,” Cho said. “Is the government simply going to tell them, ‘We issued an advisory?'”

“The stock market must not become a casino,” he added.

“Politicians rightly or wrongly are often blamed for fluctuations in the market,” Benjamin Engel, an assistant professor and expert in Korean politics at Dankook University in Yongin, told Al Jazeera.

“People seemed to be over-leveraging themselves by taking out loans to invest, and they were going to get into financial trouble when the inevitable decline in the market happened. And well, it happened.

“Now that people are paying more attention to the KOSPI and domestic stocks as a result of the chip boom, this will probably be a new factor in Korean politics moving forward,” Engel added.

While analysts have offered a range of explanations for the KOSPI’s volatility, including the rush of retail investors making leveraged bets on a handful of chipmakers, it would be wrong to blame retail investors’ losses on inexperience and the AI frenzy alone, said Bora Kim, head of Asia at Leverage Shares.

Most Korean retail investors are not new to leverage, said Kim, whose company is a major issuer of leveraged single-stock ETFs.

“Korean Investors in their 30s and 50s, already running concentrated US tech bets, have long been the core buyers in this market,” Kim told Al Jazeera.

But the launch of a leveraged ETF of the two stocks that were “already sitting in nearly every Korean portfolio” created a sense of familiarity that clouded investors’ judgement risk, Kim said, referring to Samsung Electronics and SK Hynix.

Eun-bi, the civil servant, said she had not bought any domestic leveraged products herself – but only because she had run out of money to do so.

Even so, she does not blame the government for the losses she and her peers suffered.

“Personally, I don’t think the president or the government bears responsibility for having encouraged stock investment,” she said.

“There are plenty of leveraged products overseas too, so I think once the short-term overheating of the KOSPI passes, the domestic market will probably function normally again.”

Still, Eun-bi’s experience has made her rethink her approach to investing. “Because I took such heavy losses from this fall in semiconductor share prices, I’ve come to think that from now on I should diversify across a range of fields and sectors,” she said.

“I want to watch how things go through the second half of this year and the first half of next year, and then convert everything back into cash before the wedding.”

Reporting originally appeared via Al Jazeera. Read the full source for additional context.