JPMorgan said in its latest report that South Korea’s market has been through a sharp deleveraging phase since mid-June. The bank said leveraged ETF liquidations are now largely complete, hedge fund deleveraging has reached about 90%, and related ratios have fallen back to levels it considers acceptable. On that basis, it said positioning in Korean equities now looks fairly attractive.
Why Korean stocks fell so hard
According to Barron’s, the KOSPI has slumped nearly 40% from its June 22 peak. JPMorgan said the decline began with standard fundamental concerns and sector rotation, but the move was then magnified by single-stock leveraged ETFs. Assets tied to those products briefly expanded to $50 billion in late June, sharply increasing volatility and triggering a chain reaction of position unwinds by other investors.
The report added that money that had previously rushed into leveraged ETFs has now clearly stalled, while dip-buying interest has remained limited.
Hedge fund deleveraging is mostly done
On hedge funds, JPMorgan said the long-short ratio in its prime brokerage book had once climbed to 5.7x, but had fallen to 3.2x by July 27. The bank said hedge fund leverage likely moved lower after that as well, bringing it not far from the upper end of the 2025 range.
JPMorgan also said retail margin risk appears more contained. Margin balances are currently around $20 billion, according to the report. Unlike leveraged ETFs, which can be forced to deleverage when spot prices fall, margin positions leave more room for discretion and adjustment. The bank said Korean retail investors still hold sufficient stock profits, cash positions, and overseas assets to respond to margin calls.
Foreign selling pressure is easing
The bank said record foreign selling pressure is beginning to slow. It pointed to index weight changes for Samsung Electronics and SK Hynix in the MSCI Emerging Markets Index: from 9.5% and 8.3% in late June to 6.5% and 4.5%, respectively.
Four areas JPMorgan highlighted after the selloff
With positioning improved and valuations partly repaired, JPMorgan flagged four areas for potential allocation:
- Wealth-effect plays, including department stores, cosmetics, travel, brokerages, and construction.
- Biotech and pharmaceuticals, which have lagged the KOSPI and could have room to catch up if sentiment toward global healthcare stocks improves.
- Names trading at steep discounts, where the discount has moved close to historical highs and dividend yields look attractive.
- Banks, backed by improving asset quality, wider net interest margins from the Bank of Korea’s rate-hike cycle, and stronger brokerage income as market turnover rises.