South Korea's Stock Market Frenzy: A Once-in-a-Lifetime Rally or a Recipe for Disaster?

In South Korea's $4.6 trillion stock market, euphoria has taken hold as investors, both local and foreign, bet big on the benchmark Kospi index. The index has seen a staggering 200% surge over the past year, surpassing every other market on earth. Trading volumes have reached all-time highs, while daily price swings of 5% or more have become increasingly common, making the Kospi the most volatile major stock gauge worldwide.

The sense of FOMO (fear of missing out) has reached a fever pitch, with investors scrambling to get in on the action. Data compiled by Toss Securities shows a near 10-fold surge in new account openings for under-18s in the first quarter versus a year earlier. Even families are getting in on the action, with some parents buying stocks for their kids.

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The rally has been fueled largely by South Korean chipmakers' central role in the artificial intelligence boom. Companies like Samsung Electronics Co. and SK Hynix Inc. have seen record profits, justifying the rally for some bulls. However, the risk of a sudden reversal was on display this week when the Kospi shed about $300 billion of value in less than two hours.

Despite the risks, many analysts believe that Korea's market has more room to go. Strong earnings from companies like SK Hynix, which reported a five-fold jump in quarterly profit, have prompted Wall Street banks to lift Kospi targets to 8,500, 9,000, and even 10,000 in a bull case scenario. The Kospi closed 2.6% higher at 7,844.01 on Wednesday.

However, not everyone is convinced that the rally will continue. Kyle Lee, a day trader who exited his Korean positions earlier this year, is now focusing on Nasdaq futures. "Naturally I feel some FOMO, but I don't plan to buy again now when Korean stocks keep hitting high," he said. "When a correction does come, I think it will be sharp."

The situation is playing out similarly in Taiwan, also home to key companies in the AI supply chain. "The market's relentless rise has lulled families and retail investors into a false sense of security," said Dachrahn Wu, professor at the department of economics at the National Central University in Taiwan. "Now many families are diverting the money they once set aside for buying a home into the stock market, convinced that fast gains will let them trade up to something even bigger."

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As the rally continues to gain momentum, concerns about leverage and the potential for a sudden reversal are growing. Margin balances hit a record 36.3 trillion won earlier in May, up 32% from the end of December, according to the Korea Financial Investment Association. This only captures a part of the real picture, as many loans used to buy stocks are often classified under other categories, while credit extended by smaller financiers can fall outside of the scope of official data.

For now, the situation remains volatile. As Jaewon Choi, professor of economics at Seoul National University, said, "There is a growing sentiment that social mobility is no longer possible through traditional means - it is only achievable through speculative assets."