TL;DR

• JPMorgan said KOSPI is down about 28% from its June high, but maintained its overweight on South Korea and its 12,500 target.
• The size of leveraged ETFs is estimated to have dropped from about US$50 billion to US$26 billion, and hedge funds have also deleveraged more than half.
• Selling pressure is concentrated on Samsung Electronics and SK Hynix, and tighter regulations on single-stock leveraged products will still limit the resilience of the rebound.

JPMorgan Chase estimated in a research report on July 21 that South Korea’s KOSPI index has fallen by about 28% from its peak on June 22, and leveraged ETF and hedge fund positions have shrunk significantly. However, the bank still maintains an overweight position in the Korean market, with the 12-month KOSPI benchmark target remaining at 12,500 points.

The main line of this judgment is not to simply bet on a rebound, but to interpret this sharp decline in the Korean stock market as a leverage stampede and concentrated position adjustment. According to Chase's standards, the size of South Korea's underlying leveraged ETFs has dropped from about US$50 billion at the end of June to the current US$26 billion, and about 75% of the delisting has been completed. Equity hedge fund deleveraging progress has also exceeded half. Domestic and foreign capital outflows exceeded $110 billion during the year, about 90% of which came from two major memory stocks, Samsung Electronics and SK Hynix.

But the reduction in positions does not mean that the market has returned to calm. Korean stock market volatility remains high, with the VKOSPI to VIX ratio approaching 5x, compared to the norm around 1x. Tight swap capacity, tighter regulation of single-stock leveraged products, and whether AI demand can continue to support memory and industrial chains are still the boundaries of whether this round of adjustment can truly come to an end.

The decline is deep, but the selling pressure is more like a position stampede

This round of decline in the Korean stock market has been severe enough. KOSPI hit a record closing high of 9114.55 points on June 22, and has fallen by more than 20% from its high point in early July. If calculated based on around 6516 points around July 21, the high point fell by approximately 28.5%.

The premise for JPMorgan Chase to maintain its 12,500-point target is that this round of decline is not a sudden collapse of fundamentals, but a concentrated squeeze out of previously overcrowded trading. The Korean market had previously been driven by rapid gains in AI, memory upcycles and expectations for corporate governance reforms, with some funds enlarging their exposure through leveraged ETFs, swaps and long-short fund positions. After volatility rises, liquidations and redemptions in turn exacerbate declines.

The four-week retracement of the price momentum factor is close to -26%, which also points to the same problem: stocks with stronger previous gains and more crowded funds will be under more obvious pressure.

However, the volatility itself has not yet normalized. The VKOSPI to VIX ratio is close to 5x, indicating that the domestic Korean market is much more volatile than the U.S. market. Position pressure is declining, but price shocks may still be amplified in the short term.

Leveraged ETFs drop from $50 billion to $26 billion

The most notable liquidation occurred in leveraged ETFs.

JPMorgan Chase estimates that the asset size of South Korea’s underlying leveraged ETFs has dropped from approximately US$50 billion at the end of June to the current US$26 billion, and the de-elimination progress is approximately 75%, close to the US$18 billion scale that it considers more acceptable.

This number cannot simply be understood as large-scale redemptions by investors. The cumulative capital inflow during the same period was still positive, and the decline in scale was mainly due to the decline in the underlying market. In other words, net subscriptions have not completely disappeared, but the price decline has caused leverage exposure to shrink passively.

Leveraged ETF AUM fell from about $50 billion to $26 billion, but cumulative flows remained positive.

This is why JPMorgan Chase believes that deleveraging has made substantial progress. If the scale of leveraged products continues to stay at high levels, each market decline may trigger more passive selling. After the scale is cut in half, the amplifying effect of the same price fluctuations on subsequent selling pressure will be weakened.

Looking horizontally, Korean retail investors’ margin financing itself is not extreme. According to the caliber listed in the research report, South Korea’s margin balance is approximately US$21 billion, accounting for 0.5% of the total market value of the stock market. Leveraged ETFs account for about $26 billion, or 0.7% of total market capitalization. By comparison, U.S. margin balances account for about 1.9% of market cap and leveraged ETFs about 0.3%. China A-share margin balance accounts for about 2.8%, and leveraged ETFs account for close to 0.

South Korea's margin balance is US$21 billion, accounting for 0.5% of the market value, and leveraged ETFs are US$26 billion, accounting for 0.7%.

This set of comparisons shows that the problem in the Korean market is not the abnormally high margin balance, but the high presence of leveraged ETFs in the market. Retail investors are still important buyers of the Korean stock market, and many leveraged products have still ranked high among overseas stock purchases since June. Sentiment did not cool down completely, but the decline and regulatory expectations first suppressed the leverage scale.

Hedge fund selling pressure has also dropped, but it has not returned to normal yet

The second clue came from hedge funds.

JPMorgan Prime's books show that equity hedge fund deleveraging progress has exceeded 50%, with the long-short ratio falling from a peak of more than 5.5 times to less than 4 times. This shows that the funds that increased their positions during South Korea's rapid rise in the past year have reduced a considerable part of their exposure.

The index fell by about 28%, indicating that prices have adjusted, and the decline in the long-short ratio indicates that the fuel for "forced selling" is also decreasing. If the long-short ratio continues to fall, the subsequent chain selling pressure caused by over-full positions will be lower than the state at the end of June.

But less than 4x doesn't mean it's completely normal. Deleveraging is still far from normal, and tight swap capacity and abnormal volatility have not completely subsided. In highly concentrated markets like South Korea, once financing channels become narrower, the retracement of popular stocks will be amplified, especially core positions previously supported by AI and memory chains.

"Removing 75%" cannot be directly equated to bottom confirmation. The market can fall back from its most crowded state, but as long as volatility remains high and financing remains tight, remaining positions may still magnify losses on certain trading days.

Foreign selling pressure is concentrated on two major memory stocks

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

According to a report by Morgan Chase on July 21, the net outflow of domestic and foreign capital from the Korean stock market this year exceeded US$110 billion, of which about 90% came from Samsung Electronics and SK Hynix. According to public reports, the same caliber in late June was approximately US$95 billion, and subsequent values ​​may have been updated as the market fell and foreign investors sold.

This type of concentrated outflow is different from a complete withdrawal from South Korea. The two memory stocks' weightings in the MSCI EM index have fallen to 7.5% and 5.7%, respectively, from 9.5% and 8.3% at the end of June. After the weight is reduced, the pressure on funds affected by authorization scope, benchmark weight or concentration restrictions to continue to be forced to sell will be eased.

Domestic and foreign capital outflows exceeded US$110 billion during the year, about 90% of which came from the two major memory stocks.

This is also one of the important reasons why JP Morgan still maintains its overweight position in South Korea. If foreign investors were selling Korean assets across the board, the problem would be closer to a systemic decline in confidence. If the selling pressure is mainly concentrated on two overweighted memory stocks, the market will be under pressure in a different way as the weights fall and position restrictions are eased.

Risk is 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 begins to question the sustainability of investment in AI computing power, or there are technical expectations that reduce the demand for high-end storage, Samsung Electronics and SK Hynix will still become amplifiers of foreign investment flows and index fluctuations.

Single stock leveraged products have been tightened, and it is difficult for leverage to make a comeback immediately

South Korean regulators have begun to cool down high-leverage trading.

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

These measures do not target all leveraged ETFs, but focus on single equity leveraged products. The impact is not to immediately push up the index, but to limit the re-expansion of leveraged products. Even if retail sentiment remains strong, there will be less room for funds to quickly amplify exposure through small transactions and non-cash margins.

This explains why JP Morgan is bullish on South Korea while still emphasizing the effects of supervision. If regulation is only a short-term suppression, leveraged funds may be re-accumulated through other products or markets. If the new regulations continue to take effect, the volatility amplification mechanism of the Korean stock market will weaken.

AI profit increases are still there, and risks are also in AI

Another reason for JP Morgan to remain optimistic is that South Korea’s profit forecasts are still rising.

Research reports show that the Korean market’s 2026 EPS has been revised up by 143.4% in the past six months, the technology sector has been revised up by 215.5%, and the industrial sector has been revised up by 91.0%. Even with the sharp retracement of stock prices, analysts' revisions to future earnings remain strong, especially in AI-related technology and industrial chains.

The Korean market's six-month EPS for 2026 is raised by 143.4%, the technology sector is raised by 215.5%, and the industrial sector is raised by 91.0%.

Factors supporting these upward revisions include investment in ultra-large-scale computing power, data center construction, security and resilience spending, and mid- to long-term expectations for corporate governance reforms in South Korea. For the Korean market, memory, servers, industrial equipment and related supply chains are still the most direct beneficiaries.

Risk also comes from the same direction. The fundamental fulcrum of this round of Korean stock market prices is highly dependent on the AI ​​cycle. Earnings upgrades could be revisited if AI capex slows, or if new technologies reduce demand for high-end memory and related hardware. The relative weakness of materials, consumption and other sectors also shows that the Korean market is not improving simultaneously across all industries.

JPMorgan Chase’s 12,500-point target is based on a combination of continued leverage clearing, AI demand not being falsified, and concentrated selling pressure from foreign capital easing. What can be said at the moment is that the most crowded positions in the Korean market have been significantly loosened. What cannot be said yet is that volatility has returned to normal, foreign capital has continued to flow back, or that the profit increase in the AI ​​chain has been completely locked in.