Wide-spread strategy: the South Korean stock market is in the early stages of deleveraging and risks are far from present. Clear

ON 21 JULY, THE SWAT TEAM CONCLUDED THAT THE FALL IN THE CURRENT ROUND OF KOSPI WAS CHARACTERIZED BY “LOW VALUATION, HIGH PANIC”. THE SIGNIFICANT REVERSAL OF THE INDEX FROM ITS JUNE HIGH POINT, BUT THE VALUATION REMAINS AT A HISTORICAL LOW, SUGGESTING THAT THE DECLINE WAS NOT DRIVEN PRIMARILY BY THE VALUATION BUBBLE, THAT THE RISK WAS MORE FROM TRISTAR ELECTRONICS, OVER-CONCENTRATION OF SK HERCULES WEIGHTS, AND MARKET CONCERNS ABOUT AI CAPITAL EXPENDITURE, STORAGE AIR AND CONTINUITY OF PROFITS. KOREA ' S STOCK MARKET LEVERAGE COMES MAINLY FROM CREDIT FINANCING, LEVERAGE ETFS AND OFF- AND OFF-SITE DERIVATIVES, AND THERE ARE SIGNIFICANT DIFFERENCES BETWEEN DIFFERENT INSTRUMENTS IN TERMS OF INVESTMENT OWNERSHIP, TRANSMISSION MECHANISMS AND RISK TRANSPARENCY. AT PRESENT, SOUTH KOREA ' S HOME-GROWN LEVERAGE ETF SIZE HAS BEEN DEMOCRATIZED BY 28.3 PER CENT, WITH CREDIT FINANCING AT A PEAK OF ONLY 9.3 PER CENT, STILL AT AN EARLY STAGE OF DELEVERAGING, WHILE IN-FIELD DERIVATIVES REMAIN AT HISTORICAL HIGHS, INDICATING THAT LEVERAGE IS BEING PROGRESSIVELY CHANNELLED FROM THE LEVERAGE ETF TO THE FINANCE AND DERIVATIVES. THE CURRENT KOSPI LEVERAGE HAS BEEN ACTIVATED, BUT THE CREDIT LEVERAGE AND THE TRADE-STRUCTURE LEVERAGE ARE CLEARLY AT A DIFFERENT PACE. THE EXPANSION OF THE LEVERAGE ETF SCALE IS THE MAIN SOURCE OF LEVERAGE FOR THIS ROUND. AT THE TIME, THE KOREAN MAINLAND FAMILY RESUMED A SLIGHT REBOUND IN NET REQUISITIONS AFTER A MAJOR PRE-NEGOTIATION. HISTORICAL EXPERIENCE HAS SHOWN THAT THE FIRST ROUND OF QUICK-RELEASE — RETRIEVING OF LEVERAGE — DECOMPOSES MULTI-WHEEL SHOCK — AND RETURNS TO HISTORICAL AVERAGES CAN LAST ABOUT A YEAR. IT IS NOT YET POSSIBLE TO JUDGE THAT THE CURRENT ROUND OF DELEVERAGING IS OVER, GIVEN THE STILL INADEQUATE DE-DIVERSION OF CREDIT FINANCE AND DERIVATIVES IN KOREA AND THE RE-EMERGENCE OF THE ETF. TAKEN TOGETHER, KOSPI IS STILL IN THE PHASE OF PRICE DEPTH ADJUSTMENT, INITIAL RELEASE OF LEVERAGE BUT NOT YET A SYSTEMIC LIQUIDITY CRISIS. THE CURRENT SHARE OF UNCOLLECTED MONEY IS STILL IN THE NORMAL ZONE, INDICATING THAT LARGE-SCALE REPLENISHMENT FAILURES AND PASSIVE SILOS HAVE NOT YET OCCURRED IN THE DIASPORA; HOWEVER, FOREIGN INVESTMENT AND INSTITUTIONAL SILOS, BULKAGES AND THE RETURN OF LEVERAGED FUNDS HAVE COEXISTED, LEAVING THE MARKET IN A MORE VOLATILE DISTRIBUTION PERIOD. THE FOLLOW-UP SHOULD FOCUS ON THREE RISK TRANSFER CHAINS: ONE, THE EXPANSION OF NET OUTWARD FDI AND THE WEAKENING OF THE BULK TAKE-OVER, WHICH BOOSTED THE MARKET FROM LEVERAGE TO INCREMENTAL SALES; THE OTHER, THE SHIFT OF LEVERAGE ETF FROM NEGATIVE REQUISITIONS TO DOWNBLOWNS; AND THE THIRD, THE DETERIORATION OF CREDIT FINANCING, DERIVATIVE BONDS AT PAR WITH UNCOLLECTED FUNDS, WHICH COULD LEAD TO A PARTIAL RESONANCE BETWEEN ACTIVE AND PASSIVE DELEVERAGING。