TL;DR
· JPMorgan Chase notes that the KOSPI has dropped by around 28% from its June high, but still maintains an overweight rating on South Korea and a 12,500 point target.
· The scale of leveraged ETFs is estimated to have decreased from around $500 billion to $260 billion, and hedge funds have also deleveraged by over half.
· Selling pressure is concentrated on Samsung Electronics and SK Hynix, and further tightening of regulations on single-stock leverage products will continue to limit the rebound resilience.

In a research report on July 21, JPMorgan Chase estimated that the South Korean KOSPI index has fallen by around 28% from its peak on June 22, with leveraged ETFs and hedge funds significantly reducing their positions. However, the bank still maintains an overweight position on the South Korean market, with a 12-month KOSPI benchmark target of 12,500 points.

The main theme of this assessment is not simply betting on a rebound but interpreting the recent sharp decline in the South Korean stock market as a deleveraging stampede and a rebalancing of concentrated holdings. According to JPMorgan Chase's calculations, the scale of South Korean target leveraged ETFs has decreased from around $500 billion at the end of June to the current $260 billion, with approximately 75% of the deleveraging completed. Deleveraging progress in equity hedge funds has also exceeded half. Foreign outflows this year have exceeded $110 billion, with about 90% coming from the two major memory stocks, Samsung Electronics and SK Hynix.

However, a reduction in positions does not mean that the market has returned to calm. Volatility in the South Korean stock market remains elevated, with the VKOSPI to VIX ratio approaching 5 times, compared to a normal level of around 1 time. Tightened derivative capacity, stricter regulations on single-stock leverage products, and whether AI demand can continue to support the memory and industrial chain are still on the edge of whether this adjustment can truly come to an end.

The Decline is Deep, but Selling Pressure Resembles a Position Stampede

The recent decline in the South Korean stock market has been sharp enough. The KOSPI hit a record closing high of 9,114.55 points on June 22, and by early July, it had already fallen by over 20% from the high. If we calculate around the level of about 6,516 points before and after July 21, the drop from the high is approximately 28.5%.

JPMorgan Chase's maintenance of the 12,500 point target is based on the premise that this decline is not a sudden collapse of fundamentals, but rather a liquidation of previously overcrowded trades. The South Korean market had previously seen a rapid rise driven by AI, memory upcycle, and expectations of corporate governance reform. Some funds enlarged their exposure through leveraged ETFs, derivatives, and long-short fund positions. After the increased volatility, unwinding and redemptions exacerbated the decline.

The price momentum factor has retraced close to -26% over four weeks, also pointing to the same issue: stocks that had stronger gains and more crowded funds are experiencing more evident pressure.

However, the volatility itself has not normalized yet. The VKOSPI to VIX ratio is close to 5 times, indicating that the onshore Korean market's volatility is much higher than the U.S. market. Position pressure is decreasing, but price swings may still intensify in the short term.

Leveraged ETF Assets Drop from $500 Billion to $260 Billion

The most notable liquidation occurred in leveraged ETFs.

JPMorgan estimates that the assets under management (AUM) of Korean-targeted leveraged ETFs have decreased from around $500 billion at the end of June to the current $260 billion, with a disposal progress of about 75%, approaching their deemed more acceptable size of $180 billion.

This figure should not be simply interpreted as massive investor redemptions. Cumulative inflows during the same period remain positive, and the decrease in size mainly comes from the decline in the underlying market. In other words, net purchases have not completely disappeared, but price declines have passively shrunk the leverage exposure.

Leveraged ETF AUM has dropped from around $500 billion to $260 billion, but cumulative fund flows remain positive.

This is also why JPMorgan believes that deleveraging has made substantial progress. If the scale of leveraged products continues to stay at a high level, every market decline could trigger more passive selling. After halving in size, the same price fluctuations will have a weakened amplifying effect on subsequent selling pressure.

Horizontally, Korean retail margin financing itself is not extreme. Caliber data shows that Korean margin balance is around $21 billion, accounting for 0.5% of the stock market's total market capitalization. Leveraged ETFs are about $260 billion, representing 0.7% of the total market value. In comparison, U.S. margin balance accounts for approximately 1.9% of market cap, and leveraged ETFs about 0.3%. Chinese A-share margin balance is about 2.8% of the market cap, with almost 0% for leveraged ETFs.

Korean margin balance of $21 billion accounts for 0.5% of market cap, and leveraged ETFs of $260 billion represent 0.7%.

This set of comparisons highlights that the issue in the Korean market is not the abnormally high margin balance but the relatively high presence of leveraged ETFs. Retail investors continue to be significant buyers in the Korean stock market, with multiple leveraged products still ranking high in overseas stock purchases since June. The sentiment has not completely cooled down; it's just that the decline and regulatory expectations first suppressed the leverage scale.

Hedge Fund Selling Pressure Has Also Decreased But Has Not Yet Returned to Normal

The second liquidation clue comes from hedge funds.

J.P. Morgan's Prime Book shows that the equity hedge fund deleveraging process has exceeded 50%, with the long/short ratio dropping from a peak of over 5.5 times to below 4 times. This indicates that a significant portion of the funds that increased their positions rapidly during the past year's surge in South Korea have now reduced a considerable amount of their exposure.

A 28% index drop indicates that prices have already adjusted, while the decrease in the long/short ratio indicates that the "forced selling" fuel is also diminishing. If the long/short ratio continues to fall, the subsequent chain selling pressure due to overfilled positions will be lower than the state at the end of June.

However, being below 4 times does not mean everything is back to normal. The deleveraging distance from normalcy still exists, swap capacity remains tight, and abnormal volatility has not completely subsided. In markets with high concentration like South Korea, once the financing channels narrow, the retracement of popular stocks will be amplified, especially in core holdings previously supported by AI and memory chain.

"Liquidating 75%" also cannot be directly equated with a bottom confirmation. The market can retreat from its most crowded state, but as long as volatility remains high and financing is tight, the remaining positions may still experience amplified declines on certain trading days.

Foreign Selling Pressure Concentrated on Two Major Memory Stocks

The structure of foreign flows is more critical than the total amount.

According to J.P. Morgan's report on July 21st, foreign net outflows from the Korean stock market have exceeded $110 billion USD year-to-date, with approximately 90% coming from Samsung Electronics and SK Hynix. Publicly reported, the equivalent figure in late June was around $95 billion USD, and subsequent values may have been updated with the market's decline and foreign sell-off.

This concentrated outflow is different from a full exit from South Korea. The weights of the two major memory stocks in the MSCI EM index have decreased from 9.5% and 8.3% at the end of June to 7.5% and 5.7%, respectively. After the weight reduction, funds influenced by authorization scope, benchmark weights, or concentration limits that were previously under pressure to sell will experience some relief.

Foreign net outflows have exceeded $110 billion USD year-to-date, with approximately 90% coming from the two major memory stocks.

This is also one of the key reasons why J.P. Morgan still maintains an overweight position in South Korea. If foreign funds were fully liquidating Korean assets, the issue would be closer to systemic confidence erosion. If the selling pressure is mainly concentrated on the two heavily weighted memory stocks, the market's pressure transmission will be different as the weights fall and position constraints ease.

Risks are also concentrated here. The core support of the Korean market is still related to AI capital expenditure, data center construction, and high-end storage demand. Once the market starts to question the sustainability of AI computing power input or if there are technological expectations of reduced high-end storage demand, Samsung Electronics and SK Hynix will remain amplifiers of foreign flows and index volatility.

Single Stock Leveraged Products Tightened, Leveraged Rally Hard to Come By

The South Korean regulatory authorities have started cooling down high leverage trading.

The Financial Services Commission of Korea announced on July 16 that new listings of single stock leveraged, inverse, and covered call products will be suspended. The minimum deposit requirement will be increased from 10 million KRW to 30 million KRW, expected to be implemented on August 5. Starting from August 19, initial margin will be cash only. From November, the minimum trading unit for single stock leveraged products listed in Korea is planned to be raised from 1 share to 20 shares.

These measures are not aimed at all leveraged ETFs, but rather focus on single stock leveraged products. The impact is not to immediately boost the index, but to limit the re-expansion of leveraged products. Even though retail sentiment remains strong, the space for funds to quickly amplify exposure through small trades and non-cash margins will diminish.

This explains why JPMorgan is bullish on Korea while still emphasizing the regulatory effect. If regulation is only a short-term suppression, leveraged funds may accumulate again through other products or markets. If the new rules continue to be effective, the amplification mechanism of the Korean stock market's volatility will weaken.

AI Earnings Upward Revisions Persist, Risks Also in AI

Another reason for JPMorgan's maintained optimism is that earnings expectations in Korea are still being revised upward.

Research reports show that EPS for the Korean market in 2026 has been revised up by 143.4% in the past 6 months, with the technology sector up by 215.5% and the industrial sector up by 91.0%. Even with significant price retracements, analysts' revisions to future earnings remain strong, especially focused on AI-related technology and the industrial chain.

EPS for the Korean market in 2026 has been revised up by 143.4% in the past 6 months, with the technology sector up by 215.5% and the industrial sector up by 91.0%.

The factors supporting these upward revisions include massive investment in computing power, data center construction, cybersecurity and resilience spending, and the medium- to long-term expectations of Korean corporate governance reform. For the Korean market, memory, servers, industrial equipment, and related supply chains remain the most direct beneficiaries.

Risks also come from the same direction. The fundamental support of the Korean stock market's current rally is heavily dependent on the AI cycle. If AI capital expenditure slows down, or new technologies reduce the demand for high-end memory and related hardware, the upward earnings revisions may be reassessed. The relatively weak performance of sectors such as materials and consumer goods also indicates that the Korean market is not experiencing a synchronized industry-wide improvement.

JPMorgan's 12,500-point target is based on a combination of conditions, including leverage unwinding continuing to progress, AI demand not being disproven, and foreign selling pressure easing. At the moment, it can be said that the most crowded positions in the Korean market have visibly loosened. What cannot yet be said is that volatility has returned to normal, foreign capital has switched to sustained inflows, or AI chain profit upgrades have been fully locked in.

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