JPMorgan Analysis: KOSPI Plunges 28%, But Deleveraging Is Mostly Done

TL;DR
· JPMorgan Chase notes that the KOSPI has dropped by around 28% from its June high but still maintains an overweight rating on South Korea and a 12,500 target.
· The estimated scale of leveraged ETFs has decreased from around $500 billion to $260 billion, and hedge funds have de-levered by over half.
· Selling pressure is concentrated on Samsung Electronics and SK Hynix, and the tightening regulation of single-stock leverage products will continue to limit the rebound resilience.

In a research report on July 21, JPMorgan Chase estimated that the South Korean KOSPI index has fallen by approximately 28% from its peak on June 22, with leveraged ETFs and hedge fund positions significantly reduced. However, the bank still maintains an overweight position on the South Korean market, with a 12-month KOSPI benchmark target of 12,500 points.

The main theme of this assessment is not simply betting on a rebound but interpreting the recent sharp decline in the South Korean stock market as a deleveraging stampede and a concentrated position adjustment. According to JPMorgan Chase's calculation, the scale of leveraged ETFs targeting South Korea has decreased from around $500 billion at the end of June to the current $260 billion, achieving about 75% liquidation. Deleveraging progress in equity hedge funds has also exceeded halfway. Foreign outflows this year have exceeded $110 billion, with approximately 90% coming from the two major memory chip stocks, Samsung Electronics and SK Hynix.

However, a reduction in positions does not mean that the market has returned to calm. Volatility in the South Korean stock market remains high, with the VKOSPI to VIX ratio close to 5 times, compared to a normal level of around 1 time. Tightening of derivative capacity, regulation of single-stock leverage products, and whether AI demand can continue to support the memory and industrial chain are still the boundaries for determining whether this round of adjustment can truly come to an end.

The Decline Is Deep, But the Selling Pressure Resembles Position Stampede

The recent plunge in the South Korean stock market has been severe enough. The KOSPI set a record closing high of 9,114.55 points on June 22, and by early July, it had already dropped by over 20% from that peak. If we calculate around the 6,516 point level before and after July 21, the drop from the peak is approximately 28.5%.

JPMorgan Chase's maintenance of the 12,500 point target is based on the premise that this decline is not a sudden collapse of fundamentals but rather a squeezing out of previously overcrowded trades. The South Korean market had previously experienced rapid growth driven by AI, the memory upcycle, and expectations of corporate governance reform. Some funds amplified their exposure through leveraged ETFs, derivatives, and long-short fund positions. After the increased volatility, unwinding and redemptions in turn exacerbated the decline.

The price momentum factor has retreated by nearly -26% over four weeks, also pointing to the same issue: stocks that had a stronger rally before and had more crowded funds are under more pressure.

However, the volatility itself has not normalized yet. The VKOSPI/VIX ratio is close to 5, indicating that the volatility of the South Korean domestic market is much higher than the U.S. market. Position pressure is decreasing, but price fluctuations may still intensify in the short term.

Leveraged ETF AUM Drops from $500 Billion to $260 Billion

The most notable sell-off occurred in leveraged ETFs.

JPMorgan estimates that the asset under management (AUM) of South Korean-targeted leveraged ETFs has dropped from around $500 billion at the end of June to the current $260 billion, with a liquidation progress of about 75%, approaching their deemed more acceptable $180 billion level.

This figure should not be simply interpreted as massive investor redemptions. Cumulative inflows during the same period remain positive, and the decrease in size mainly stems from the decline in the underlying market. In other words, net purchases have not completely disappeared, but the price drop has already caused a passive deleveraging.

Leveraged ETF AUM has dropped from around $500 billion to $260 billion, but cumulative fund flows remain positive.

This is also why JPMorgan believes that deleveraging has made substantial progress. If the scale of leveraged products continues to stay at high levels, every market decline could trigger more passive selling. After halving in size, the same price swing would have a weaker amplifying effect on subsequent selling pressure.

From a horizontal perspective, South Korean retail margin financing is not extreme. According to the report's data, South Korea's margin balance is around $21 billion, accounting for 0.5% of the stock market's total value. The leveraged ETF is approximately $260 billion, representing 0.7% of the total market value. In comparison, the U.S. margin balance is about 1.9% of market value, and the leveraged ETF is around 0.3%. China's A-share margin balance accounts for approximately 2.8% of market value, with almost no presence of leveraged ETFs.

South Korea's margin balance of $21 billion represents 0.5% of the market value, while the $260 billion leveraged ETF accounts for 0.7%.

This set of comparisons illustrates that the issue in the Korean market is not an abnormally high margin balance but rather the relatively high presence of leveraged ETFs. Retail investors are still significant buyers in the South Korean stock market, with several leveraged products ranking high in overseas stock purchases since June. The sentiment has not completely cooled off; it's just that the decline and regulatory expectations have initially reduced the leverage scale.

Hedge Fund Selling Pressure Has Eased, But Has Not Yet Returned to Normal Levels

The second liquidation clue comes from hedge funds.

J.P. Morgan's Prime Book shows that the equity hedge fund deleveraging process has exceeded 50%, with the long/short ratio dropping from a peak of over 5.5 times to below 4 times. This indicates that funds that aggressively increased their exposure during the rapid rise in South Korea over the past year have cut a significant portion of their positions.

A 28% drop in the index indicates that prices have already adjusted, while the decrease in the long/short ratio indicates that the "forced selling" pressure is also diminishing. If the long/short ratio continues to fall, the subsequent chain reaction selling pressure caused by overleveraged positions will be lower than at the end of June.

However, being below 4 times does not mean everything is back to normal. The deleveraging distance from normality still exists, collateral capacity remains tight, and abnormal volatility has not completely subsided. In markets with high concentration like South Korea, once the financing channels narrow, the retracement of popular stocks can be amplified, especially for core positions previously supported by AI and memory chain themes.

"Liquidating 75%" also cannot be directly equated to a bottom confirmation. The market can retreat from its most crowded state, but as long as volatility remains high and financing is tight, the remaining positions may still experience significant declines on certain trading days.

Foreign Selling Pressure Focused on Two Major Memory Stocks

The structure of foreign flows is more crucial than the total amount.

According to J.P. Morgan's July 21 report, foreign outflows from the South Korean stock market have exceeded $110 billion net year-to-date, with approximately 90% coming from Samsung Electronics and SK Hynix. In public reports, the comparable figure in late June was around $95 billion, and subsequent figures may have been updated with market declines and foreign selling.

This kind of concentrated outflow is different from a complete exit from South Korea. The weights of the two major memory stocks in the MSCI EM Index have dropped from 9.5% and 8.3% at the end of June to 7.5% and 5.7%, respectively. After the weight reduction, the pressure of continued forced selling due to authorized scope, benchmark weights, or concentration restrictions will be somewhat alleviated.

Foreign outflows have exceeded $110 billion net year-to-date, with approximately 90% coming from the two major memory stocks.

This is also one of the key reasons why J.P. Morgan still maintains an overweight position in South Korea. If foreign selling were a complete sell-off of Korean assets, the issue would be closer to systemic confidence erosion. If the selling pressure is mainly focused on the two heavily weighted memory stocks, as the weights fall and position constraints ease, the market pressure mechanism will be different.

The risk is also concentrated here. The core support of the Korean market is still related to AI capital expenditure, data center construction, and high-end storage demand. Once the market begins to question the sustainability of AI computing power input or there are technical expectations of reduced demand for high-end storage, Samsung Electronics and SK Hynix will still act as amplifiers of foreign flows and index volatility.

Single Stock Leveraged Products Tightened, Immediate Releveraging Unlikely

South Korea's regulatory authorities have begun cooling down high-leverage trading.

The Financial Services Commission of South Korea announced on July 16 that it would suspend the launch of new single stock leveraged, inverse, and covered call products. The minimum deposit requirement will be raised from 10 million Korean won to 30 million Korean won, expected to be implemented on August 5. Starting from August 19, only cash will be counted as initial margin. From November, the minimum trading unit for South Korean listed single stock leveraged products is planned to be raised from 1 share to 20 shares.

These measures are not aimed at all leveraged ETFs but specifically target single stock leveraged products. The impact will not immediately drive the index higher but rather restrict the reexpansion of leverage products. Even if retail sentiment remains strong, the space for funds to quickly increase exposure through small trades and non-cash margins will decrease.

This explains why JPMorgan is bullish on South Korea while still emphasizing the regulatory effect. If regulation is only a short-term suppression, leveraged funds may accumulate again through other products or markets. If the new rules remain effective, the amplification mechanism of the South Korean stock market's volatility will weaken.

AI Earnings Revisions Up, Risks Also in AI

Another reason JPMorgan remains optimistic is that earnings expectations in South Korea are still being revised upward.

A research report shows that South Korea's market EPS for 2026 has been revised up by 143.4% in the past 6 months, with the technology sector up by 215.5% and the industrial sector up by 91.0%. Despite significant price retracement, analysts' revisions to future earnings remain strong, especially focusing on AI-related technologies and the industrial chain.

South Korea's market EPS for 2026 has been revised up by 143.4% in the past 6 months, with the technology sector up by 215.5% and the industrial sector up by 91.0%.

The factors supporting these upward revisions include massive-scale computing power investment, data center construction, security and resilience spending, and the medium- to long-term expectations for corporate governance reform in South Korea. For the South Korean market, memory, servers, industrial equipment, and related supply chains remain the most direct beneficiaries.

Risks also come from the same direction. The fundamental pillar of the current South Korean stock market rally is highly dependent on the AI cycle. If AI capital expenditure slows down or new technologies reduce the demand for high-end memory and related hardware, the upward earnings revision may be reassessed. The relatively weak performance of sectors like materials and consumer goods also indicates that the South Korean market is not experiencing industry-wide synchronized improvement.

JPMorgan's 12,500-point target is built on a combination of conditions where deleveraging continues, AI demand remains unchallenged, and foreign selling pressure is easing. Currently, it can be said that the most crowded positions in the Korean market have significantly unwound. What cannot be said yet is that volatility has returned to normal, foreign capital has shifted to sustained inflows, or AI chain profits have been firmly locked in.