Morgan Stanley: South Korean Stock Market Leverage Unwinding Progresses 75%, Maintains 'Overweight' Rating and 12,500 Point Target Price

The South Korean KOSPI index rebounded strongly on Tuesday (21st), once triggering a temporary halt in program buying due to excessive gains. Meanwhile, Morgan Stanley released its latest strategy report pointing out that although the KOSPI has fallen about 28% from its high on June 22, this is not a fundamental collapse but a process of de-leveraging triggered by crowded trading.

Morgan Stanley's analysis believes that the market's previous decline was magnified by the clearing of high-leverage funds, passive reduction of leverage ETFs, and adjustment of hedge fund positions. According to estimates, the scale of South Korean-related leverage ETFs has decreased from a high of approximately $500 billion to $260 billion, with a de-leveraging progress of about 75%, approaching the $180 billion level that the firm considers reasonable.

Additionally, the de-leveraging progress of equity hedge funds has also exceeded half, with the long/short ratio falling from a peak of over 5.5 times to below 4 times. Compared to the U.S. and Chinese markets, South Korean retail investors' margin balance accounts for only 0.5% of the total market value, indicating that retail leverage does not constitute a systemic risk.

In terms of foreign capital flows, foreign capital has net flowed out of the South Korean stock market by over $1.1 trillion this year, with about 90% concentrated in the two major memory leaders, Samsung Electronics and SK Hynix. Morgan Stanley points out that the main reason for this selling pressure is that the relevant stocks previously had too high a weight in the MSCI Emerging Markets Index, reaching the holding limit of long-term funds, not a fundamental turn for the worse. As stock prices fall and weights decrease, forced selling pressure has eased somewhat.

Although short-term volatility (VKOSPI) remains high, Morgan Stanley still firmly looks optimistically at South Korea's medium-term prospects, maintaining an 'overweight' rating and setting a 12-month KOSPI target at 12,500 points. The report emphasizes that, benefiting from global AI spending, data center demand, and South Korean corporate governance reform, South Korea's market EPS expectations have been significantly raised by 143.4% in the past six months, with the technology sector's upward adjustment reaching 215.5%.

To cool down high-leverage trading, South Korean regulators have announced that they will tighten the listing and trading restrictions of single-stock leverage products starting in August, which will help weaken the future volatility amplification mechanism. However, Morgan Stanley also reminds that the high concentration of the South Korean stock market means that its subsequent performance is still closely related to the continuity of AI capital expenditure. If signs of AI demand being disproven appear, large-cap stocks may still become amplifiers of volatility.