South Korean Stocks Rebound Strongly as Deleveraging Nears End, JPMorgan Estimates 75% Progress

South Korea's stock market experienced a significant rebound on Wednesday (22nd) following a sharp sell-off since July, with the benchmark Kospi index surging over 6% in a single day, bringing its two-day cumulative gain close to 10%.

Although the Korea Exchange briefly triggered a circuit breaker for program trading due to extreme volatility, market participants widely view this as a sign that the deleveraging pressures that previously battered the market are nearing an end.

Data shows that South Korean equities have lost approximately $1.2 trillion in market value since their June peak, with the Kospi index falling nearly 30% from its high. This sharp decline was primarily driven by leveraged ETF liquidations, shrinking retail margin balances, and concerns over the sustainability of the memory chip boom.

However, JPMorgan analysis indicates that the deleveraging process for leveraged ETFs in South Korea is now about 75% complete. Data from the Korea Financial Investment Association shows that as of July 16, retail margin balances had declined to 33.4 trillion won (approximately $22.6 billion), down 13% from the end-of-June peak and reaching a three-month low. Analysts believe that with the substantial reduction of "toxic leverage," the market's risk-reward profile has turned favorable.

This rebound was led by semiconductor giants. SK Hynix surged over 9% on improved sentiment around artificial intelligence (AI), while Samsung Electronics also gained over 6%. Foreign investors net bought over $1 billion in South Korean stocks during Wednesday morning, marking the first net buying in about a month.

Despite short-term volatility, both Morgan Stanley and JPMorgan remain confident in South Korean equities. JPMorgan maintains its 12,500-point target for the Kospi index and an "overweight" rating, emphasizing that the recent sell-off was driven by supply-demand factors rather than a deterioration in corporate fundamentals. Morgan Stanley maintains its base-case target of 9,000 points, although it slightly lowered its bear-case forecast, noting that valuations are now near historical lows.

Additionally, government oversight of leveraged trading will be strengthened. Starting in August, the minimum deposit requirement for leveraged ETFs will increase from 10 million won to 30 million won.

Experts predict that while explosive growth in 2025 may slow, South Korea's long-term fundamentals remain relatively solid, supported by AI investment, data center demand, and improvements in corporate governance.