JPMorgan said in a July 29 research note that South Korea’s KOSPI may be moving into a valuation recovery phase after a steep deleveraging cycle that followed the index’s near 40% drop from its June 22 peak. The bank said leveraged ETF liquidations have already been completed, hedge fund deleveraging is more than 90% done, and the market’s positioning structure has gone through a broad washout even if short-term price pressure has not fully faded.
The TechFlowPost article, written by Rita, said JPMorgan’s call rests on three conditions holding at the same time: positioning pressure has eased, valuations are cheap enough, and earnings fundamentals have not broken down. Put together, those factors led the bank to argue that Korean equities have entered a window for valuation repair.
Three sources of leverage have largely been flushed out
JPMorgan framed the sell-off as a deleveraging event rather than a reflection of worsening fundamentals. The report split market leverage into three layers and assessed each one separately.
Leveraged ETFs fell from $50 billion to $17 billion
The first layer was leveraged ETFs. According to the article, those products swelled to $50 billion by the end of June, a size equivalent to four times the relative market scale seen in the United States. As the market fell, forced liquidations amplified the downside. Assets have now dropped to $17 billion and inflows have largely stalled. JPMorgan said that means the leveraged ETF unwind is complete.
Hedge funds cut long-short exposure from 5.7x to 3.2x
The second layer was hedge funds. Prime brokerage data cited by JPMorgan showed hedge fund long-short ratios had climbed as high as 5.7x before falling to 3.2x as of July 27. Taking into account the performance of price momentum factors on July 28 and July 29, the bank estimated that hedge fund deleveraging had passed the 90% mark and was close to the upper end of what it viewed as a normal range in 2025.
Retail margin was not seen as the main risk
The third layer was retail margin financing. JPMorgan said margin lending comes with built-in collateral buffers and broker discretion, which makes it different from automatic forced liquidation during price declines. Korean retail investors still hold substantial unrealized gains in equities, cash deposits, and overseas assets, the report said, giving them room to meet margin calls if needed. The bank added that retail financing was never the main source of risk. Outstanding margin balances were about $20 billion, and their share of market capitalization was lower than at the start of the year.
Across all three channels, the unwind was either close to complete or already finished. In JPMorgan’s view, the most violent phase of forced selling has passed.
Foreign selling pressure may be nearing an end
The article said foreign outflows were another major weight on Korean equities, but also described them as the other side of the same deleveraging cycle. Foreign investors have been net sellers of more than $110 billion this year, with about 90% of that concentrated in two memory chip giants. The companies were not named in the article, though it said they were also major underlying holdings of leveraged ETFs.
That overlap mattered. Forced selling tied to leveraged ETFs intensified passive foreign reductions, and the two flows reinforced each other, producing what the article described as a historically rare pace of decline for the KOSPI.
The report also pointed to changes in index weights. The two companies’ weights in the MSCI Emerging Markets Index fell from 9.5% and 8.3% at the end of June to 6.5% and 4.5%. As those weights dropped, passive fund selling pressure eased sharply. JPMorgan said the biggest driver of foreign outflows should also fade once leverage-led liquidations are out of the system.
Valuations have dropped to crisis-like levels
On valuation, the KOSPI’s 12-month forward price-to-earnings ratio has fallen to 5x. The article said that even after accounting for the semiconductor industry’s cyclical nature, the market is now trading in what looks like a crisis-style pricing range. Free cash flow yields were described as being at similar levels.
JPMorgan’s model, according to the article, implies that current market pricing assumes memory prices will return by early 2027 to levels seen before the AI boom. But the report said both spot and contract prices are still rising, and third-quarter contract prices continue to move higher on a quarter-over-quarter basis, even if the pace of increase has slowed.
The bank’s view was that equity prices already reflect a large amount of pessimism and that concern about the memory cycle has moved ahead of the underlying facts.
Four areas JPMorgan highlighted after deleveraging
At the end of the note, JPMorgan listed four areas it said investors should watch once deleveraging is complete.
- Wealth-effect beneficiaries: department stores, cosmetics, tourism, brokerages, and construction. The bank said these groups stand to benefit directly from an improving household balance sheet and a recovery in consumer willingness to spend in South Korea.
- Biopharma: the sector lagged badly during the correction, but the article said sentiment toward global healthcare is improving, leaving room for a catch-up move.
- Preferred shares: preferred stock discounts are near the widest historical range, and JPMorgan said the resulting yields offer attractive holding returns.
- Banks: the bank pointed to three tailwinds — better asset quality alongside income growth, support for net interest margins from the Bank of Korea’s rate-hike cycle, and stronger brokerage revenue as market turnover expands.
The article closed with a simple framing: after leverage has been forced out, cheap valuations and resilient earnings become the main story. Prices have fallen 40%, leverage has come down, and memory prices are still rising. JPMorgan’s conclusion was that once positions are cleared, the market can start to find its way back.
Disclaimer
The piece said it was a compilation and interpretation by Chaoxiang Research of a third-party broker report from JPMorgan dated July 29, 2026, combined with public market information. Any ratings, target prices, earnings forecasts, and related judgments cited in the article were described as the views of the broker’s analysts only, representing their institution rather than Chaoxiang Research, and not constituting investment advice. The article also said it should not be used as a basis for buying or selling any securities.
Chaoxiang Research @chaoxiangooo
