JPMorgan Maintains Overweight on Korean Stocks, Target at 12,500 Points; 75% of Leverage Unwound

JPMorgan Chase (JPM-US) released a new research report on Tuesday (21st), stating that the South Korean Composite Index (KOSPI) has declined approximately 28% from its peak on June 22, with significant reductions in leveraged ETFs and hedge fund positions. Nevertheless, the bank maintains its 'Overweight' rating on the South Korean market and keeps its 12-month KOSPI target at 12,500 points.

The core of this analysis is not simply a bet on a rebound, but rather interpreting South Korea’s recent sharp market correction as a release of leveraged and short-selling pressure, along with a reshuffling of highly concentrated positions.

JPMorgan notes that the size of leveraged ETFs tracking South Korean assets has dropped from around $50 billion at the end of June to $26 billion currently, with about 75% of deleveraging completed. Equity hedge funds have also cut leverage by more than half.

Year-to-date foreign capital outflows have exceeded $11 billion, with about 90% concentrated in two dominant memory stocks: Samsung Electronics and SK Hynix.

However, position reduction does not mean the market has stabilized. South Korea’s market volatility remains high, with the VKOSPI to VIX ratio nearly five times the normal level of around 1.

Tight swap lines, tighter regulation on single-stock leveraged products, and uncertainty over whether AI demand can continue to support memory and industrial supply chains remain key factors determining whether this correction has truly bottomed out.

Sharp Decline, But More Like a Crowd-Driven Selloff

Despite the deep fall, the selling pressure resembles a portfolio cleanse. After KOSPI hit a record closing high of 9,114.55 on June 22, it fell over 20% by early July. As of around July 21, at approximately 6,516 points, the cumulative decline from the peak is about 28.5%.

JPMorgan’s rationale for maintaining the 12,500-point target is that this downturn is not due to a sudden collapse in fundamentals, but rather the forced liquidation of previously overcrowded trades.

Over the past year, South Korea’s stock market surged on AI demand, memory cycle recovery, and expectations of corporate governance reforms, with some capital amplifying exposure via leveraged ETFs, swap trades, and long-short funds. As volatility rose, forced liquidations and fund redemptions further accelerated the decline.

The momentum factor’s four-week pullback of nearly 26% reflects the same phenomenon: stocks that previously rose the most and attracted the most capital are now under the heaviest selling pressure.

Yet, volatility itself has not normalized. The VKOSPI to VIX ratio nears 5, indicating South Korea’s volatility remains significantly higher than U.S. markets. While position pressure is easing, short-term price swings may still be amplified.

Leveraged ETF Size Shrunk by 75%

The most visible unwinding has come from leveraged ETFs. JPMorgan estimates that assets in leveraged ETFs investing in South Korea have dropped from around $50 billion at the end of June to $26 billion currently, a 75% reduction, approaching the bank’s estimated healthy level of $18 billion.

However, this data cannot be interpreted simply as massive investor redemptions. Net fund inflows during the same period remained positive; the decline was primarily due to falling underlying market values. In other words, net subscriptions haven’t fully disappeared, but price declines have passively reduced leveraged exposure.

This is why JPMorgan believes deleveraging has made substantial progress. If leveraged product sizes remained high, each market drop could trigger additional passive selling. With sizes halved, the amplification effect of the same price volatility on subsequent selling pressure will weaken.

In cross-sectional comparison, South Korean retail margin borrowing has not reached extreme levels. Data shows margin balances at about $21 billion, or 0.5% of total market cap; leveraged ETFs at $26 billion, or 0.7% of market cap. In contrast, U.S. margin balances are about 1.9% of market cap, leveraged ETFs at 0.3%; China A-shares have margin balances at about 2.8% of market cap, with leveraged ETFs near 0%.

This suggests South Korea’s real issue isn’t abnormally high margin debt, but rather an excessively high proportion of leveraged ETFs. Retail investors remain a key buyer in South Korea’s market—since June, several leveraged products have remained among the most popular overseas stock purchases. Market sentiment hasn’t fully cooled; instead, price corrections and regulatory expectations prompted the leverage drawdown first.

Hedge Fund Selling Pressure Easing, But Not Yet Normal

A second market cleansing signal comes from hedge funds.

JPMorgan’s Prime Broker data shows equity hedge funds have cut leverage by over 50%, with the long/short ratio falling from over 5.5x at its peak to below 4x. This indicates that capital positioned during last year’s rapid rally has significantly reduced exposure.

A 28% index drop signals price correction, while a lower long/short ratio means the fuel for 'margin call sell-offs' is diminishing. If the ratio continues to fall, the domino effect from over-leveraged positions will be smaller than at the end of June.

However, leverage below 4x doesn’t mean the market has fully normalized. Deleveraging isn’t complete, and swap funding constraints and abnormal volatility haven’t fully dissipated. In a highly concentrated market like South Korea, tighter funding channels could amplify declines in popular stocks, especially core holdings previously supported by AI and memory themes.

'75% position unwinding' doesn’t directly confirm a market bottom. The market has indeed moved far from its most crowded state, but as long as volatility remains high and funding constrained, remaining positions could still amplify declines on specific trading days.

Foreign Selling Pressure Concentrated in Two Memory Giants

The structure of foreign capital flows is more telling than total outflows. According to JPMorgan’s Tuesday report, foreign net outflows from South Korea’s stock market have exceeded $11 billion this year, with about 90% coming from Samsung Electronics and SK Hynix.

End-of-June public reports showed similar figures around $9.5 billion; subsequent numbers may have been updated due to market declines and continued foreign rebalancing.

This concentrated outflow differs from a broad sell-off of South Korean assets. In the MSCI Emerging Markets Index, the weights of the two memory giants have dropped from 9.5% and 8.3% at the end of June to 7.5% and 5.7% respectively.

As weights decline, selling pressure from funds constrained by authorization limits, benchmark weights, or concentration caps has eased.

This is a key reason JPMorgan maintains its 'Overweight' rating on South Korea. If foreign investors were broadly dumping Korean assets, the issue would resemble a systemic loss of confidence. But if selling is concentrated in two over-weighted memory stocks, as weights fall and position limits loosen, the market’s pressure dynamics will differ.

Yet, risks remain concentrated here. South Korea’s market core support still hinges on AI capital spending, data center construction, and high-end memory demand. If the market begins questioning the sustainability of AI investment or new technologies reduce high-end memory demand, Samsung and SK Hynix will remain amplifiers of foreign flows and index volatility.

Tighter Rules on Single-Stock Leveraged Products Limit Quick Leverage Rebuild

South Korean regulators have recently begun cooling high-leverage trading. On July 16, the Financial Services Commission (FSC) announced a suspension of new listings for single-stock leveraged, inverse, and yield-enhancing products. Minimum margin requirements will rise from 10 million to 30 million won starting August 5; from August 19, initial margin will only count cash. Starting November, the minimum trading unit for listed single-stock leveraged products in Korea will increase from 1 to 20 shares.

These measures don’t target all leveraged ETFs, but focus on single-stock leveraged products. Their impact isn’t immediate index movement, but rather limiting the speed at which leverage can be repriced. Even if retail investor sentiment remains strong, the ability to quickly expand exposure via small trades and non-cash margins will be reduced.

This explains why JPMorgan, while bullish on Korea, emphasizes regulatory impact. If regulations are only short-term leverage suppression, capital may rebuild leverage through other products or markets. If new rules are long-term, the mechanism amplifying volatility in Korea’s market will gradually weaken.

AI Earnings Expectations Still Rising, But AI Risks Persist

Another reason JPMorgan remains positive is that earnings expectations for Korean companies continue to rise.

The research report shows that 2026 EPS estimates for Korean firms have been consistently revised upward over the past six months, driven by strong AI-related capex, data center buildouts, and robust demand for high-bandwidth memory (HBM). Semiconductor firms, in particular, have seen earnings upgrades due to surging HBM demand from generative AI adoption.