Retail Investors Fuel Asia's AI Rally With Borrowed Money, Raising Correction Risk

Stock markets in Japan, South Korea and Taiwan are swinging wildly as a rally in artificial intelligence stocks collides with a growing problem: the sheer scale of debt retail investors are taking on to buy shares. Analysts and financial regulators across the region warn that this level of leverage could turn any price correction into a serious shock for household finances.

What the three markets have in common is an extreme concentration of market value in a handful of tech companies tied directly to the AI supply chain. In South Korea, Samsung and SK Hynix together account for more than half of the KOSPI's total value, while in Taiwan, TSMC alone makes up over 40 percent of the exchange's market capitalization.

Where the leverage comes from

Retail investors across East Asia are widely using brokerage accounts that let them buy stocks with borrowed money, betting on further gains driven by demand for chips, servers and large language model services. As long as prices keep rising, leverage boosts profits, but at the first signs of a correction the same mechanisms accelerate and deepen the losses, since brokerages force the sale of collateral as portfolio values decline.

Margin buying acts like fuel during rallies, but it just as effectively amplifies price swings - Masanari Takada, strategist at JPMorgan

Regulators sound the alarm

The head of South Korea's Financial Supervisory Service warned bluntly that the current market volatility could deal a serious blow to household finances. For some companies, such as Japan's Kioxia and Fujikura, margin debt ratios reach 12 and over 20 respectively, meaning most investor positions are financed with debt rather than their own capital.

A rally disconnected from fundamentals

The situation in Asia stands in contrast to recent warnings from other parts of the world about an AI market bubble, since here the problem isn't the valuation of the tech companies themselves but how local investors are financing their participation in the rally. Analysts stress that while the business fundamentals of leading chipmakers remain solid thanks to real demand for AI infrastructure, the scale of leverage at the retail level is a separate phenomenon, and potentially far more dangerous in the short term.

For Polish retail investors, who in recent years have increasingly bought funds and ETFs with exposure to Asian semiconductor companies, the situation is a warning sign. A sudden reversal of sentiment on the exchanges in Tokyo, Seoul or Taipei could spill over into global tech indexes much faster than the fundamentals of these companies alone would suggest, given how closely semiconductor supply chains are linked to the rest of the world.

Regulators in the region say they will keep a closer watch on margin debt levels, though so far none of the countries has introduced additional restrictions on lending for stock purchases. The coming weeks will show whether June's sharp drops were a one-off correction or the first sign of a longer period of elevated volatility on Asia's AI-linked stock markets.

Sources: KrAsia (kr-asia.com)