JPMorgan Sees KOSPI Rebound to 12,500 After Market Washout

JPMorgan has maintained its 12-month KOSPI target at 12,500 points. The firm assessed that the recent sharp sell-off was driven by a combination of leverage unwinding and foreign capital flows rather than a deterioration in corporate fundamentals. As the market normalizes, it expects the long-term bullish trend to resume.

In its South Korea Equity Strategy report released on the 21st, JPMorgan reaffirmed its 12-month target of 12,500 for the KOSPI. The bank noted that recent market adjustments were largely amplified by the liquidations of leveraged ETF and hedge fund positions, adding that much of this excessive leverage has now been cleared.

“The pullback was initially triggered by standard fundamental concerns and sector rotation,” JPMorgan stated. “However, leveraged ETFs amplified the decline, which has recently shifted toward broader hedge fund position liquidations.”

The firm added, “Over the past 6 to 7 weeks, we have continuously highlighted elevated market volatility and the potential for forced selling by foreign investors. This process is acting as a self-correcting mechanism to cool an overheated market. The key focus now is how quickly this abnormal market environment normalizes.”

JPMorgan estimated that the leverage unwinding is entering its final stages. Assets under management (AUM) for Korean stock-based leveraged ETFs, which swelled to approximately $50 billion at the end of June, have dropped to around $26 billion. Consequently, the firm estimates that roughly 75% of the overall liquidation process is complete.

In addition, hedge fund deleveraging has progressed significantly. According to JPMorgan’s Prime Brokerage book, the long-short (LS) ratio has dropped from over 5.5x to below 4.0x, indicating that hedge fund deleveraging is more than 50% complete.

Tightening government regulations are also expected to support further leverage reduction. Starting in August, the required base deposit for leveraged products will rise from 10 million KRW to 30 million KRW, and only cash will be accepted as initial margin. Furthermore, new listings of single-stock leveraged ETFs will be temporarily suspended, and the minimum trading unit will expand from 1 share to 20 shares starting in November.

“Leveraged ETF assets are likely to shrink further,” JPMorgan noted, suggesting a sustainable target level of approximately $18 billion (around 26.5 trillion KRW).

Regarding retail margin trading, JPMorgan assessed that current levels do not pose a systemic risk. Margin debt balances have declined from about $25 billion to $21 billion, accounting for roughly 0.5% of total stock market capitalization—significantly lower than the US (1.9%) and China’s A-share market (2.8%).

Foreign capital outflow pressure is also easing. Year-to-date, South Korea has seen foreign outflows exceeding $110 billion. About 90% of these net sales were heavily concentrated in two tech giants, Samsung Electronics (005930) and SK Hynix (000660), deepening their price declines.

“This marks one of the largest annual capital outflows recorded in Asian market history,” JPMorgan explained. “As the market caps of both stocks expanded, Emerging Market (EM) investors hit portfolio concentration limits, forcing them to reduce holdings whenever prices surged.”

The bank further noted, “Following recent price corrections in memory chipmakers, their weights in the MSCI Emerging Markets Index (MSCI EM) have dropped to 7.5% for Samsung Electronics and 5.7% for SK Hynix, significantly reducing foreign selling pressure.” This represents a notable decline from late June, when their weights stood at 9.5% and 8.3%, respectively.

JPMorgan also viewed concerns over slowing memory chip demand as overblown. While the rise of open-source AI models raises questions about monetization at the model layer, the economics of data center leasing for hyperscalers remain solid.

Additionally, while some speculate that technological advancements might reduce memory usage per unit, the firm emphasized that such scenarios have yet to materialize.

Looking ahead, JPMorgan remains bullish on the Korean stock market in the long run. Beyond the AI boom, it pointed to positive wealth effects benefiting the financial and consumer sectors, alongside ongoing corporate governance reforms. In particular, the firm expects corporate governance reform to re-emerge as a major investment thesis in the second half of this year.

Sources : https://www.news1.kr/finance/general-stock/6234190