JPMorgan Bullish on South Korean Stocks: Leverage Pressure Significantly Released, Maintains Overweight Rating

BlockBeats News, July 21st, JPMorgan Chase stated in its latest South Korea Stock Strategy Report that the South Korean market fundamentals remain solid. The recent significant drop in the KOSPI was more a result of high-leverage fund deleveraging, leveraged ETF passive unwinding, and hedge fund position adjustments amplifying together. The bank maintains an overweight rating on the South Korean market, with a 12-month KOSPI target of 12,500 points.

The report pointed out that the KOSPI has fallen around 28%-29% from its high on June 22nd. The initial correction came from routine fundamental concerns and fund rotation. However, as volatility increased, leveraged ETFs, long-short equity funds, and macro funds' positions began to be squeezed, leading to a further market downturn. JPMorgan Chase believes that this is more like a deleveraging of crowded trades rather than a systemic reversal of South Korean assets' logic.

In terms of deleveraging progress, the pressure has significantly eased. JPMorgan Chase estimates that the size of relevant South Korean leveraged ETFs has dropped from a peak of around $50 billion to about $26 billion, with a deleveraging progress of about 75%. Long-short equity funds have deleveraged by more than half, with the long-short ratio in the JPM Prime book dropping from a peak of over 5.5 times to below 4 times.

Retail leverage has also not posed systemic risks. South Korea's financing balance has dropped from a peak of over $25 billion to about $21 billion, accounting for only 0.5% of the total market value, significantly lower than levels in the U.S. and China's A-share markets. The report states that financing pressure is mainly concentrated in the small-cap KOSDAQ market, with limited impact on KOSPI large-cap stocks.

Regarding foreign outflows, foreign outflows from South Korea since the beginning of the year have exceeded $110 billion, with about 90% coming from two storage leaders. JPMorgan Chase believes that this selling pressure does not entirely represent a bearish view of the fundamentals but is due to the previously high weight of relevant stocks in the MSCI EM, touching some long-term funds' holding limits. With the decline in stock prices and index weight reduction, the forced selling pressure has eased.

On the fundamental side, JPMorgan Chase remains optimistic about South Korea's medium-term prospects. The report stated that global AI spending, security and resiliency spending, corporate and household wealth effects, and South Korean corporate governance reform will continue to support the South Korean stock market. Although the market has recently re-examined AI model monetization, at the cloud service provider level, the economic viability of data center leasing remains strong, and hyperscalers continue to invest in AI infrastructure with unabated momentum.