Is the Korean Stock Sell-Off a Buying Opportunity? Morgan Stanley Upgrades to 'Overweight': KOSPI Has 36% Upside Potential

Morgan Stanley has recently upgraded its investment rating for the South Korean stock market from neutral to overweight, arguing that the recent market-wide 'deleveraging' has created a more favorable entry point for investors to position themselves for the dual themes of artificial intelligence (AI) and an industrial supercycle.

Led by Daniel K. Blake, Morgan Stanley's strategy team stated in its latest report that with crowded trades and large-scale leverage unwinding now largely concluded, the Korea Composite Stock Price Index (KOSPI) could target the 9,000-point level—representing approximately 36% upside potential from current levels.

The report analyzes that the recent downturn in Korean equities is primarily a 'technical correction' rather than a result of deteriorating fundamentals. The deleveraging process—including leveraged ETFs, hedge fund leverage positions, and retail margin debt—is estimated to be more than halfway complete.

Looking back at the recent market movement, the KOSPI has plunged roughly 30% from its June highs. South Korean equities, once seen as a leading indicator of AI demand in Asia, sharply reversed course amid massive capital outflows. Additionally, the rapid expansion of single-stock leveraged ETFs and excessive concentration of index weightings in a few large-cap stocks further amplified selling pressure.

Looking ahead, Morgan Stanley forecasts KOSPI's reasonable short-term trading range between 5,500 and 10,500 points. Key large-cap stocks such as Samsung Electronics (005930KS) and SK Hynix (000660KS) are expected to play a crucial role in supporting the index's valuation.

The firm also expressed optimism about the performance of industrial, defense, and financial stocks during this market phase, suggesting these sectors could benefit from thematic rotation and deliver independent outperformance.