JPMorgan said in a July 21 note that South Korea’s KOSPI has fallen about 28% from its June 22 peak, while leverage tied to ETFs and equity hedge funds has been cut sharply. Even after that drop, the bank kept its overweight call on Korea and left its 12-month base-case target for the KOSPI unchanged at 12,500.
The bank’s argument was not built on a simple rebound trade. It described the sell-off as a forced unwind of leverage and crowded positioning. By its estimates, Korea-linked leveraged ETF assets fell from about $50 billion at the end of June to $26 billion now, implying roughly 75% of the cleanup has already taken place. Equity hedge fund deleveraging has moved past the halfway mark as well. Foreign investors have also pulled more than $110 billion from Korean equities this year, and about 90% of that outflow came from Samsung Electronics and SK Hynix.
That does not mean the market has settled down. JPMorgan said Korean equity volatility is still elevated, with the ratio of VKOSPI to the VIX near 5x, versus a normal level around 1x. Tight swap capacity, stricter regulation for single-stock leveraged products, and open questions around whether AI demand can continue to support memory and industrial supply chains are still setting the limits for any recovery.
KOSPI’s 28% drop has not changed JPMorgan’s target
The scale of the decline has been severe. The KOSPI closed at a record 9,114.55 on June 22. By early July, it was already down more than 20% from that high. Using a level near 6,516 around July 21, the drawdown from the peak comes to about 28.5%.
JPMorgan said its 12,500 target rests on the view that this was not a sudden break in fundamentals. Instead, an overcrowded trade was being pushed out of the market. Korean equities had rallied quickly on expectations tied to AI, an upcycle in memory, and corporate governance reform. Some of that exposure had been amplified through leveraged ETFs, swaps, and long-short fund positioning. Once volatility rose, liquidations and redemptions fed back into the decline.
The bank also pointed to a four-week retreat of nearly -26% in the price momentum factor. In its reading, stocks that had run the hardest and attracted the most crowded positions were the ones now under the heaviest pressure.
Volatility, though, has not normalized. A VKOSPI-to-VIX ratio near 5x suggests Korean market volatility remains far above that of the US market. Positioning pressure is easing. Price swings can still stay large in the near term.
Leveraged ETF assets fell from $50 billion to $26 billion
The clearest sign of the unwind showed up in leveraged ETFs.
JPMorgan estimated that assets in Korea-linked leveraged ETFs dropped from about $50 billion at the end of June to $26 billion now. That puts the unwind at roughly 75% and brings the market closer to what the bank sees as a more acceptable level of around $18 billion.
The bank said this should not be read as a wave of outright investor redemptions. Cumulative fund flows over the same period were still positive. The shrinkage in assets was driven mainly by the decline in the underlying market. Net subscriptions had not fully disappeared, but falling prices compressed leverage exposure anyway.
That helps explain why JPMorgan thinks deleveraging has made real progress. If these products had remained large, each leg lower in the market could have triggered more passive selling. With assets cut sharply, the same price moves should have less power to amplify later sell pressure.
On a cross-market comparison, Korean retail margin balances do not look extreme on their own. The note said margin balances stood at about $21 billion, or 0.5% of total market capitalization. Leveraged ETFs were about $26 billion, or 0.7% of market cap. In the US, margin balances equal roughly 1.9% of market cap and leveraged ETFs about 0.3%. In China’s A-share market, margin balances are around 2.8% and leveraged ETFs are near zero.
That comparison points to a specific issue. The problem in Korea is not unusually high margin balances. It is the larger footprint of leveraged ETFs in the market. Retail investors remain a major source of buying in Korean equities, and since June several leveraged products have still ranked near the top in overseas stock purchases. Sentiment has not fully cooled. The pullback and the regulatory outlook have simply pushed leverage lower first.
Equity hedge fund deleveraging passed 50%
A second signal came from hedge fund positioning.
According to JPMorgan’s Prime book, equity hedge fund deleveraging has gone beyond 50%, and the long-short ratio has fallen from a peak above 5.5x to below 4x. That suggests funds that added aggressively during the past year’s run-up in Korea have already cut a meaningful share of their exposure.
A roughly 28% drop in the index shows prices have adjusted. A lower long-short ratio means the fuel for forced selling is also being reduced. If that ratio keeps falling, the risk of chain-reaction selling driven by overloaded positioning should be lower than it was at the end of June.
Still, below 4x is not the same as normal. JPMorgan said deleveraging is not complete, and both tight swap capacity and abnormal volatility remain in place. In a concentrated market like Korea, any narrowing in financing channels can magnify pullbacks in popular names, especially the core holdings tied to AI and the memory chain.
The same caution applies to the 75% unwind estimate. It does not amount to a bottom call by itself. The market may have moved away from its most crowded setup, but as long as volatility stays high and financing stays tight, the remaining positions can still worsen down days.
More than $110 billion in foreign outflows was concentrated in Samsung and SK Hynix
JPMorgan said the structure of foreign flows matters more than the headline number.
By the bank’s July 21 figures, net foreign outflows from Korean equities this year have exceeded $110 billion, with about 90% of that tied to Samsung Electronics and SK Hynix. Public reporting in late June had cited a comparable figure of about $95 billion, which suggests the number has likely been updated as the market fell further and selling continued.
This kind of concentrated outflow is different from a broad retreat from Korea. The weights of the two memory names in the MSCI Emerging Markets Index have already fallen from 9.5% and 8.3% at the end of June to 7.5% and 5.7%, respectively. With those weights lower, investors constrained by mandates, benchmark weights, or concentration limits should face less pressure to keep selling mechanically.
That is one reason JPMorgan has not changed its overweight view. If foreign investors were selling Korean assets across the board, the issue would look much closer to a wider contraction in confidence. If the pressure is centered on two oversized memory names, the market dynamic changes once those weights and position constraints start to ease.
Korean regulators moved to cool single-stock leverage
The main risk sits in the same part of the market. Korea’s core support is still tied to AI capital spending, data center construction, and demand for high-end storage. If investors start to question how durable AI compute spending really is, or if new technology expectations begin to weigh on demand for premium memory, Samsung Electronics and SK Hynix could keep amplifying both foreign flows and index volatility.
Regulators have already started tightening conditions for high-leverage trades.
South Korea’s Financial Services Commission said on July 16 that it would suspend new listings of single-stock leveraged, inverse, and covered call products. The minimum deposit requirement will rise from KRW 10 million to KRW 30 million, with implementation expected on Aug. 5. Starting Aug. 19, only cash will count toward initial margin. From November, the minimum trading unit for listed single-stock leveraged products is set to rise from one share to 20 shares.
These measures are not aimed at all leveraged ETFs. They are focused on single-stock leveraged products. The effect is not an immediate lift for the index, but a cap on how quickly leverage can build again. Even if retail appetite stays strong, there will be less room to scale exposure rapidly through small-ticket trades and non-cash margin.
That helps explain why JPMorgan can stay constructive on Korea while still emphasizing regulation. If the restrictions only suppress activity for a short period, leverage could rebuild through other products or markets. If the rules stick, the market’s volatility-amplifying mechanism should weaken.
2026 EPS estimates rose 143.4% in six months
Another reason JPMorgan has kept its positive stance is that earnings expectations for Korea are still moving higher.
The note said 2026 EPS estimates for the Korean market have been revised up by 143.4% over the past six months. The increase was 215.5% for tech and 91.0% for industrials. Even after the sharp pullback in prices, analysts are still making strong upward revisions to future earnings, especially in AI-related technology and industrial supply chains.
The factors behind those revisions include hyperscale compute spending, data center construction, security and resilience spending, and longer-term expectations tied to Korean corporate governance reform. In the Korean market, memory, servers, industrial equipment, and related supply chains remain the most direct beneficiaries in this framework.
The risk comes from the same area. The fundamental base of Korea’s recent rally is closely tied to the AI cycle. If AI capital spending slows, or if new technology cuts expected demand for premium memory and related hardware, the earnings upgrade story could be reassessed. Relative weakness in materials and consumer sectors also shows the improvement is not broad-based across all industries.
JPMorgan’s 12,500 target depends on several conditions holding at once: continued leverage cleanup, no breakdown in AI demand, and easing concentrated foreign selling. For now, the bank’s message is that the most crowded positions in Korea have loosened materially. What it is not saying is that volatility has already normalized, that foreign money has started a sustained return, or that earnings upgrades across the AI chain are already locked in.