| Good morning. The apparent demise of the international rules-based order has come for the world of football (soccer to you, Americans), and people on the internet (and Uefa) are very upset. Meanwhile, we appear to be entering that weird summery market environment where the narrative flips around every other day. Last week, it was Nasdaq and semis bad, the Dow industrials and pharma good. On Monday, that flipped. Pour one out for the momentum traders. Today, some thoughts and some charts on the eye-popping year so far in (two) Korean stocks. Send us your thoughts: unhedged@ft.com.  <img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/t/2/47857/saehoon@coffeepot.me/5817747077646525/0/0'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/47857/saehoon@coffeepot.me/5817747077646525?pid=1'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/47857/saehoon@coffeepot.me/5817747077646525?pid=2'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/47857/saehoon@coffeepot.me/5817747077646525?pid=3'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/47857/saehoon@coffeepot.me/5817747077646525?pid=4'> |  |
It has been a pretty wild ride in South Korean stocks so far this year, and regulators are getting jumpy. The Kospi 200 index is up 113 per cent. In May, the Korean stock market overtook Canada’s to become the seventh largest in the world. Money is rushing in. From Goldman Sachs: The problem is, if you are worried about stock market concentration over in the US, Korea is on a whole other level. Just two memory chip stocks — Samsung and SK Hynix — now make up more than half of the index. Together, they are leaving the country’s stocks in carmakers, industrial conglomerates and financial groups in the dust. (Capitalising on a good run, SK Hynix yesterday started the process to list $28bn of new shares in the US.)  OK, so, who cares? TSMC basically is the Taiwanese stock market and even in the US, despite rumours of the group’s demise, the Magnificent Seven still account for about a third of the S&P 500’s total market cap. This chart, from UBS’s canonical Global Investment Returns Yearbook, shows that concentration, as of 2025, was everywhere all at once. Presented with permission of the authors: Still, the speed with which Samsung and SK Hynix have gobbled up their share of the market is bracing. At the start of the year the two companies represented a relatively modest 36 per cent of the index, according to the Bank of Korea, which in May judged that the chip boom would protect the economy from the energy shock impacts of the Iran war. With great concentration comes great volatility. Market-wide trading has been halted four times in the past month. One culprit in all this mania is the leveraged ETFs, such as KODEX SK Hynix Single Stock Leverage ETF (net asset value of about $3.4bn), which allow short-term investors to speculate on single stocks in the hope of magnified returns. The mechanics behind the leveraged ETFs are starting to worry lawmakers and regulators. The funds rebalance their leverage each day to reflect the stock’s or index’s price performance. If the price rises, they buy more swaps and futures to maintain a 2X exposure, triggering market makers to buy more shares to hedge their own exposure to the ETF. If it falls, they sell, amplifying volatility in the market. Yesterday a former presidential candidate called for the ETFs to be delisted, writing on Facebook that they are a “complete policy failure. Every day, it is eating away at trillions of won in corporate value and public wealth.” This followed the Bank of Korea’s warning over the weekend that they could widen losses for retail investors. Normally we would be quite worried about the risks of spillovers to other markets, but it looks like foreign investors are already taking profits or backing away or both. That meant spillover risks “may be less of a concern”, said Mansoor Mohi-uddin at Bank of Singapore. Still, for both Korea and Taiwan, it is uncomfortable territory when a national stock market essentially behaves like a sector sub-index. As Société Générale wrote in June: The broader point is about market structure rather than fundamentals. A rally this narrow and this fast, built on capex guidance that has already been revised higher several times in a short period, is effectively priced for spending to keep surprising on the upside. When a single theme dominates to this extent, markets tend to struggle if that theme even pauses, rather than reverses. The capex commitments are massive relative to anything seen before in semiconductors. Rather, it is a case for sizing exposure to Korea and Taiwan with clarity on what it represents — a proxy for the persistence of global AI capex — rather than treating it as a diversified regional allocation. None of this fills us with confidence for the long term, but tell us we’re wrong and it’s all fine.  <img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/t/2/40827/saehoon@coffeepot.me/8175842081734281/0/0'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/40827/saehoon@coffeepot.me/8175842081734281?pid=1'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/40827/saehoon@coffeepot.me/8175842081734281?pid=2'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/40827/saehoon@coffeepot.me/8175842081734281?pid=3'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/40827/saehoon@coffeepot.me/8175842081734281?pid=4'> |  |
Son bets the house on AI | 
