JP Morgan stated on the 21st that deleveraging in Korean stocks is nearing completion. The investment bank maintained its 12-month KOSPI target of 12,500 and 'overweight' recommendation. The approximately 28% decline in KOSPI from its June peak resulted primarily from leveraged ETF unwinding and hedge fund position liquidations. JP Morgan noted that while Korean stock market fundamentals remain solid, intense deleveraging pressured prices, with the market's self-correcting mechanism currently in operation.
JP Morgan Reports 75% Completion of Leveraged ETF Deleveraging
JP Morgan identified leveraged ETFs and hedge fund position closures as core drivers of KOSPI's decline in its report titled 'Korean Stock Market Deleveraging Process Trends.' Leveraged ETF net assets based on Korean assets decreased from $50 billion (approximately 73.7 trillion won) at the end of June to $26 billion (approximately 38.3 trillion won) recently. JP Morgan stated that approximately 75% of the reduction process toward the appropriate level of $18 billion (approximately 26.5 trillion won) has been completed. The bank also noted that hedge fund deleveraging has progressed over 50%. JP Morgan projected that government regulations starting in August—including the base deposit increase from 10 million won to 30 million won and the suspension of new single-stock leveraged ETF listings—will contribute to market stabilization.
Foreign Investor Selling Pressure Eases as MSCI Weights Decline
Foreign investors sold over $110 billion in Korean stocks this year, with approximately 90% concentrated in memory semiconductor stocks including Samsung Electronics and SK Hynix. JP Morgan explained that mechanical weight reductions occurred as the two stocks' market capitalizations grew excessively, exceeding inclusion limits in the MSCI Emerging Markets (EM) index. Recent price corrections reduced MSCI EM index weights for Samsung Electronics from 9.5% to 7.5% and SK Hynix from 8.3% to 5.7%, substantially easing foreign investor supply pressure and selling momentum. JP Morgan dismissed concerns about memory semiconductor demand slowdown raised by some market participants, stating such concerns are not confirmed in actual markets. The bank maintained that forward demand including AI-related data center investment remains solid.
South Korea to Implement New Trading Regulations Starting August
South Korean authorities will implement stricter trading regulations starting in August. The base deposit requirement will increase from 10 million won to 30 million won. Authorities will also suspend new listings of single-stock leveraged ETFs. Mixo Das, JP Morgan's Head of Korea Equity Strategy, stated that AI investment cycle continuation and corporate governance improvement issues will emerge as key momentum in the second half, maintaining the 'overweight' opinion on Korean stocks and the KOSPI target of 12,500.
FAQ
What caused the 28% decline in KOSPI from its June peak?
JP Morgan attributed the decline primarily to leveraged ETF unwinding and hedge fund position liquidations. Leveraged ETF net assets decreased from $50 billion at the end of June to $26 billion recently.
Why did foreign investors sell over $110 billion in Korean stocks this year?
Approximately 90% of foreign selling concentrated in Samsung Electronics and SK Hynix due to mechanical weight reductions, as the two stocks' market capitalizations exceeded inclusion limits in the MSCI Emerging Markets index.
