JPMorgan said in its latest Korea equity strategy report on July 21 that South Korea’s market fundamentals remain solid, and that the recent sharp drop in the KOSPI was amplified mainly by the unwinding of highly leveraged positions, passive reductions from leveraged ETFs, and hedge fund position adjustments. The bank kept its overweight rating on the Korean market and maintained a 12-month KOSPI target of 12,500.
KOSPI decline seen as a deleveraging-driven move
The report said the KOSPI has fallen about 28%-29% from its June 22 high. JPMorgan said the initial correction came from routine fundamental concerns and capital rotation, but as volatility picked up, leveraged ETFs, equity long-short funds, and macro funds were forced to cut positions, which deepened the selloff.
In the bank’s view, the move looks more like deleveraging in a crowded trade than a systemic reversal in the case for Korean assets. It said market pressure has already eased noticeably when judged by the progress of deleveraging.
Leveraged ETF and long-short positioning has come down
JPMorgan estimated that Korea-related leveraged ETF assets fell from roughly $50 billion at the peak to about $26 billion, with deleveraging around 75% complete. Equity long-short funds have also finished more than half of their deleveraging, while the long-short ratio in the JPM Prime book dropped from above 5.5x at the peak to below 4x.
The report also said retail leverage does not amount to a systemic risk. Korea’s margin balance has fallen from more than $25 billion at the peak to about $21 billion, or just 0.5% of total equity market capitalization, well below comparable levels in the United States and China’s A-share market.
According to JPMorgan, financing pressure is concentrated mainly in the small-cap KOSDAQ market, limiting the impact on large-cap KOSPI names.
Foreign outflows were concentrated in two memory leaders
On foreign selling, the report said year-to-date foreign outflows from Korea have exceeded $110 billion, with about 90% tied to two memory leaders. JPMorgan said that pressure does not fully reflect a negative view on fundamentals. Instead, the stocks had previously reached elevated weights in MSCI EM, pushing some long-term investors up against position limits.
As share prices pulled back and index weights declined, that forced selling pressure has started to ease.
Medium-term outlook remains constructive
On fundamentals, JPMorgan said it remains positive on South Korea’s medium-term outlook. The report said global AI spending, spending on security and resilience, wealth effects for companies and households, and Korean corporate governance reforms should continue to support the country’s equity market.
While the market has recently questioned monetization at the AI model layer again, JPMorgan said data center leasing economics remain strong at the cloud provider level, and hyperscalers still have the incentive to keep investing in AI infrastructure.