Emerging-market stock volatility is falling at the fastest pace in more than six years as Korean tech leverage unwinds.
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Emerging-market fear gauge drops 11 points to 25% as Korea unwinds
Emerging-market stock volatility is falling at the fastest pace in more than six years as Korean tech leverage unwinds.
Emerging-market stock volatility fell almost 11 percentage points to 25% in August, the steepest monthly drop since April 2020, as Korean tech leverage unwound. The gauge, the CBOE's VXEEM measure of implied volatility in developing-nation stocks, had climbed to a 46% peak in July when swings in Asian semiconductor shares fueled demand for protection against an AI-led selloff.
The decline "looks like a result of position unwinding" rather than a shift in tech fundamentals, and its speed is "consistent with leverage clearing," said Varun Laijawalla, co-portfolio manager of emerging-market equities at Ninety One. The emerging-market volatility premium over the U.S. VIX has narrowed to under 10 percentage points from roughly 30 points in July.
The retreat marks a cooling of a rally that pushed the MSCI Emerging Markets index up 28% to a June 22 peak, with about 75% of the gains concentrated in SK Hynix, Samsung Electronics and Taiwan Semiconductor Manufacturing Co. The three stocks still account for about 30% of the iShares MSCI Emerging Markets ETF, leaving the gauge exposed should the AI narrative shift again.
Leverage unwinds as regulators tighten
Daily turnover in the 16 single-stock leverage and inverse products tied to Samsung and SK hynix plunged 90.4% to 842.9 billion won from a three-month daily average of 8.7696 trillion won, Korea Exchange data show. All 16 products, listed May 27, trade below their 20,000 won reference price. More than 1 trillion won flowed out of the five largest products over the past month, led by 399.4 billion won from KODEX Samsung Electronics Single Stock Leverage and 270.2 billion won from KODEX SK hynix Single Stock Leverage.
Regulation accelerated the unwind. Financial authorities raised the minimum cash deposit for single-stock leverage products to 30 million won on July 31, and from Aug. 19 new investors must complete five hours of simulated trading over five sessions before trading. KOSPI swings have narrowed this month after sidecars and circuit breakers triggered repeatedly in July.
Investors shifted into benchmark funds. TIGER U.S. S&P 500 drew net inflows of 1.0434 trillion won, the most of any ETF, followed by KODEX U.S. Nasdaq 100 at 702.4 billion won and KODEX 200 at 661.0 billion won.
HSBC turns overweight, but concentration risk lingers
The slowdown in single-stock leverage inflows prompted HSBC Holdings to upgrade Korean stocks to overweight last week, with analysts citing cleared leverage and strong earnings growth. Money is rotating toward health care, financials, domestic consumption and Latin America, sectors with no material exposure to the AI capex cycle, Laijawalla said.
Risks remain. The Iran conflict is unresolved, and a hawkish Federal Reserve could push the dollar higher, pressuring emerging-market assets. With the three tech names still dominating the flagship ETF, the durability of the calm depends on the AI narrative holding.
This article is for informational purposes only and does not constitute investment advice.
