South Korea - Tip of the Liquidity Spear

Summary

When global liquidity begins to contract, it shows up in the high beta asset classes and volatile names because these assets are most sensitive to changes in liquidity. In bull markets of any significant length, investors forget that the expanding liquidity which rapidly pushed up asset prices in the recent past, decreases prices with the equal severity when it contracts.

Key Points

• The KOSPI Index in South Korea has experienced a +300% rally in 6 months, partly due to the AI boom, but also influenced by contractions in global liquidity and a weakening Korean Won.
• High retail participation in the Korean market, with 60-70% of daily transaction volume generated by retail investors, has contributed to the outsized performance.
• Contractions in global liquidity are currently appearing in various ancillary asset markets worldwide, including precious metals like silver and gold, which have suffered sharp declines in 2026.
• FINRA margin debt has reached a new all-time high, indicating high retail investor enthusiasm, and has historically been correlated with major declines.