RESOLVING THE LEDGER
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A wave of South Korean investors is flocking to U.S. markets to avoid a correction at home, even as global investors pile in.
Korean retail investors net sold domestic stocks for most of last week, even as the benchmark index entered bull market territory, according to Korea Exchange data. Overseas investors reversed course to become net buyers.
Here are five things related to those investors:
Of the $4.5 billion in U.S. stocks Korean investors net bought in July, around $840 million went into the chipmaker's U.S.-listed depositary receipts, according to Korea Securities Depository data. SK Hynix's ADRs were the second most net-purchased U.S. securities, even though Korean investors can buy the same company directly at home.
The U.S. receipts have traded at a premium to the Korean shares, which Owen Lamont, senior vice president of Acadian Asset Management, said was about 10% recently. They're also exhibiting greater volatility.
"That's absolutely crazy," Lamont said of Korean investors buying SK Hynix's U.S.-listed shares. "There's no reason for a Korean investor to buy ADRs of Korean stocks in the U.S."
Such price discrepancies are unusual and can be a warning sign of speculative excess, Lamont said. "They're a symptom of the bubble," he said, pointing to similar dislocations involving Taiwanese and Indian companies around the dot-com boom.
One of the 10 most popular U.S. stocks among investors this month was a leveraged product -- ProShares Ultra QQQ ETF -- which ranked No. 7.
In July, four of the 10 most net purchased U.S. stocks were leveraged products, according to data from Korea Securities Depository.
The most popular was the Direxion Daily Semiconductor Bull 3X Shares ETF, or SOXL, which aims to deliver three times the daily performance of a semiconductor index, data show. The leveraged ProShares UltraPro QQQ and ProShares Ultra QQQ ranked fourth and sixth.
Investors may be changing markets without necessarily changing the bet.
"The irony is that if you parse the data and look at what they're buying, it's largely shares tied up in the same AI hardware theme that's been selling off in the local market," Phillip Wool, head of research at Rayliant Global Advisors, said.
Jung In Yun, founder of Fibonacci Asset Management, said some traders hurt by losses in Korean semiconductor shares or leveraged ETFs may be shifting to U.S. AI stocks they perceive as higher-quality or more liquid.
"They are not necessarily reducing their exposure to the AI theme," Yun said. "They may simply be changing the geographical vehicle through which they express the same view."
Korean retail investors net bought around $4.5 billion in U.S. stocks last month, according to Korea Securities Depository data. That was a sharp pickup from June and near the net purchases of $5 billion in January.
At the same time, the country's shares saw a massive selloff, following a spectacular rally that drew retail investors into semiconductor stocks and leveraged products, before staging a rebound this month.
Margin loan balances in the Korean stock market stood at about 37 trillion won ($26 billion) at the end of June, before tumbling to 27 trillion won earlier this month, the lowest level this year, according to the Korea Financial Investment Association.
While July's purchases were "strong" but not unprecedented, Lamont said, "it is still pretty interesting that they increased their U.S. buying even as the Korean market was plunging," he added.
Whether the influx of Korean money can meaningfully increase volatility across the much larger U.S. market is another question.
Wool sees little risk of that. While retail investors can have an outsized influence in Korea, U.S. markets are dominated by professional and institutional investors, making even large Korean flows small relative to overall turnover.
Lamont sees greater potential for distortions in individual names and corners of the market favored by retail traders. He pointed to Korean investors' rush into U.S. "quantum" stocks in late 2024, and said the proliferation of leveraged ETFs across Korea, Hong Kong and the U.S. is "possibly adding volatility and magnifying market fluctuations."
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