Morgan Stanley Upgrades South Korean Stocks to 'Overweight' After 'Leverage Washout,' Targets 36% Rally to 9,000 Points

Morgan Stanley recently upgraded its rating on the South Korean stock market to 'overweight,' stating that the recent 'leverage washout' effect in the market has created a more attractive entry point for investors to position into artificial intelligence (AI) trends and the industrial super-cycle.

A team of strategists led by Daniel K. Blake noted that after intense deleveraging and position cleansing, the Korea Composite Stock Price Index (KOSPI) has 36% upside potential based on Morgan Stanley’s target price of 9,000 points. The firm had previously rated Korean equities at 'equalweight.'

The KOSPI plunged as much as 5.5% on Monday (the 3rd), following a single-day surge of 18% the previous trading session.

Morgan Stanley’s strategist team believes the recent sell-off in South Korean stocks was primarily a 'technical correction,' with the deleveraging process—driven by leveraged ETFs, hedge fund positions, and retail margin financing—now more than halfway complete.

The KOSPI has declined over 30% from its June highs, as traders rapidly exited what they viewed as an Asia-facing AI demand proxy. High exposure to leveraged ETFs among individual stocks and concentrated index weightings further amplified the downturn.

South Korean regulators have stepped in to curb the use of such financial instruments, and the government plans to restrict retail investor access to leveraged products, including setting limits on risk exposure relative to total portfolio assets.

Looking ahead, Morgan Stanley expects the KOSPI to trade in a volatile range between 5,500 and 10,500 points in the near term. Samsung Electronics and SK Hynix are expected to provide valuation support, while sectors such as industrials, defense, and finance are anticipated to benefit from favorable tailwinds.

At the same time, Morgan Stanley also upgraded Thailand’s equity market from 'equalweight' to 'overweight,' citing the country’s improving foreign direct investment (FDI) inflows and national competitiveness as signs of growing market potential.

Analysts added that Thai corporate earnings are turning upward and valuations remain low, with key individual stocks poised to benefit from AI-related capital expenditures and energy security themes.

In contrast, the firm downgraded Australia’s equity market from 'equalweight' to 'underweight,' citing multiple interest rate hikes and tax reforms that have weakened real estate investment incentives, thereby capping upside potential. Additionally, the earlier thesis that Australian energy exposure would benefit from geopolitical tensions such as those involving Iran is no longer considered valid.