Kospi whiplash calls to rein in rosy forecasts, margin trading

South Korea's Kospi fell 22.19 percent in July after surging 101.14 percent in the first half, prompting calls for tighter scrutiny of overly bullish brokerage research and stricter margin-lending rules. Industry officials argue that inflated expectations and heavily leveraged trading amplified retail investors' losses, with retail investors dumping 106 trillion won ($73.46 billion) worth of shares over five trading days. Samsung Electronics and SK hynix saw earnings misses versus overly aggressive forecasts, and forced liquidations exceeded 60 billion won during the sell-off.

AI chip optimism fueled aggressive bets, while margin trading amplified retail investors' losses South Korea's roller-coaster stock market in July has prompted calls for tighter scrutiny of overly bullish brokerage research and stricter margin-lending rules, with industry officials arguing that inflated expectations and heavily leveraged trading amplified retail investors' losses amid sharp market swings. According to the Korea Exchange, the Kospi fell 22.19 percent in July after surging 101.14 percent in the first half. Circuit breakers were triggered on two consecutive trading days for the first time before the benchmark rebounded a record 17.91 percent on Friday. Amid the repeated volatility, retail investors engaged in panic selling, dumping a combined 106 trillion won $73.46 billion worth of shares over the previous five trading days. Even on Friday, when the Kospi surged, retail investors sold 28 trillion won worth of shares, resulting in net selling of 9.9 trillion won in a single session. A market insider, speaking on condition of anonymity, said brokerages had fueled excessive expectations by repeatedly raising earnings forecasts and target prices for AI-related semiconductor stocks during the rally. Critics said such optimistic forecasts encouraged investors to build aggressive positions in AI-related stocks, leaving them vulnerable when earnings failed to meet elevated expectations. Samsung Electronics reported a second-quarter operating profit of 89.5 trillion won, beating the FnGuide consensus of 84.98 trillion won by more than 6 percent. However, several brokerages, including KB Securities and Kiwoom Securities, had projected earnings of up to 100 trillion won, sending shares down more than 6 percent as investors viewed the results as disappointing. SK hynix showed a similar pattern. The consensus estimate from 14 brokerages stood at 64.09 trillion won, while actual operating profit came to about 60.5 trillion won. Analysts said overly aggressive AI-related forecasts had inflated expectations. Target prices also diverged after earnings. Korea Investment & Securities raised its target for SK hynix to 4.7 million won, while BNK Investment & Securities cut it to 1.48 million won. Of 17 brokerages issuing reports after earnings, only two raised their targets, while seven lowered them and eight left them unchanged. Samsung Electronics also saw downward revisions. Mirae Asset Securities cut its target price to 370,000 won from 550,000 won. Critics said the revisions showed brokerages were following, rather than leading, the market. "Most brokerage earnings estimates exceeded actual results, and higher target prices tended to encourage investor participation," a securities industry official said on condition of anonymity. Industry officials also cited margin lending as another factor that amplified volatility. Samsung Electronics, Samsung Electronics preferred shares, SK hynix and SK Square accounted for more than 40 percent of the Kospi's margin loan balance. Forced liquidations of retail investors who failed to meet repayment obligations exceeded 60 billion won during the sell-off. The forced selling repeatedly hit large-cap semiconductor stocks such as Samsung Electronics and SK hynix as their share prices fell sharply, further adding to downward pressure on the market. "Hedge funds and retail investors had built unusually aggressive leveraged positions in SK hynix. When AI concerns emerged and the market fell 15 to 20 percent, forced liquidations intensified the selling pressure," a financial industry source said. "In the end, brokerages benefit from increased trading activity, including forced liquidations. Margin lending requirements for retail investors should be tightened." ch0221@heraldcorp.com