On-the-ground insights from a Goldman Sachs Korea trader: Korean equities face 'prolonged and painful' deleveraging, with long-only funds staying silent

Author and source: Wall Street News

On July 14, South Korea's KOSPI index plunged 9% to close at 6,800 points, triggering its seventh circuit breaker since 2026.

South Korean equities suffered heavy losses, driven not by worsening fundamentals but by a forced unwinding of positions sparked by leveraged products.

According to Wind Trading Desk, Chris Cha, a Seoul-based sales trader at Goldman Sachs, stated in his market commentary on July 14 that the KOSPI plunged 9% that day to close at 6,800 points, triggering the seventh circuit breaker mechanism since 2026.The core driver of this decline was the concentrated deleveraging of newly listed single-stock leveraged ETFs, rather than any negative fundamental signals or earnings downgrades.Foreign and domestic institutional investors together recorded net sales exceeding USD 2.6 billion on the day.

Notably, amid the sharp market drop, long-only institutional investors remained unusually quiet, with block trading activity surprisingly subdued. Goldman Sachs views this sell-off as a 'liquidity-driven position unwinding' rather than a structural signal of a cyclical peak, and recommends investors use extreme volatility as an opportunity to accumulate high-conviction memory chip and technology names.

The immediate trigger for the KOSPI’s sharp drop was escalating tensions in the Middle East—specifically, rising U.S.-Iran tensions near the Strait of Hormuz—but the real amplifier of losses was the mass unwinding of recently launched single-stock leveraged ETFs.

According to Chris Cha’s report, semiconductor-linked 2x leveraged ETF products fell more than 30% on the day, forcing large-scale gamma rebalancing trades that created a downward spiral.This mechanism accounted for 62% of domestic institutions’ net selling volume that day. SK Hynix and Samsung Electronics dropped 15.4% and 10.7%, respectively, yet neither company faced any negative fundamental catalysts or earnings forecast downgrades, indicating the sell-off was entirely driven by positioning factors.

Regulators responded swiftly. On the same day, Lee Chan-jin, Governor of South Korea's Financial Supervisory Service, convened CEOs of 20 major asset management firms to express strong concern over the systemic risks posed by these products and their 'overheated' marketing practices, urging enhanced consumer protection. Regulatory focus is expected to center on raising product access thresholds rather than an outright ban, though specific measures have not yet been announced.

In terms of fund flows, both foreign and domestic institutional investors were net sellers on the day.Foreign investors recorded net selling of USD 1.3 billion, of which USD 1.18 billion came from programmatic trading, almost entirely representing passive selling; local institutions had net outflows of USD 1.5 billion, primarily driven by ETF-related unwinding.

Observations from Goldman Sachs' trading desk corroborate this passively driven market dynamic: despite the dramatic index decline, institutional block trading activity remained surprisingly subdued. The report noted that visible active selling on the day was largely attributable to momentum-driven hedge funds, while net-long institutions stayed on the sidelines.

Over the past three months, foreign investors have cumulatively sold a net USD 71.5 billion worth of KOSPI equities, with 88% concentrated in the technology sector, significantly reducing global investors’ positioning in the Korean market.

From a technical perspective, the KOSPI closed precisely at the 6,800 level—the 52-week Fibonacci support. Since mid-June, the index has been trading within a well-defined downtrend channel and has now reached a critical technical inflection point.

If the 6,800 support level breaks, the next major support lies at 6,500 (approximately 4.5% below the day's close), aligning with the 38.2% Fibonacci retracement over a three-year horizon. Further downside would target the 6,100–6,000 range, representing a 10%–12% decline from the day’s closing level.The report notes that the KOSPI’s typical one-standard-deviation daily move is 2.8%, but recent intraday volatility has frequently exceeded two standard deviations, increasing the likelihood of testing the lower support zone. Additionally, the KOSPI’s 14-day RSI has dropped to 37.2, approaching oversold territory.

This sharp sell-off shows a clear divergence from institutional investors’ fundamental outlook. According to feedback gathered by Goldman Sachs’ sales team during last week’s roadshow in Singapore,institutional investors broadly believe the recent correction has restored Korean tech stocks to an exceptionally attractive risk-reward profile, and many have already begun rebuilding exposure to memory chips.

The bullish case centers on the expectation that structural equipment shortages will delay industry capacity expansion until the second half of 2028, leaving forward EPS estimates resilient despite the sharp price correction. A minority of bears express concern over potential average selling price (ASP) declines in Q4 2026 and the risk of the HBM4 cycle peaking.

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