Key Takeaways:
The KOSPI's 28% plunge from its June peak was a leverage-driven stampede, not a fundamental breakdown — and the worst of the unwind is already behind it, according to JPMorgan.
The KOSPI has fallen about 28% from its June 22 record high of 9,385 to around 6,516, driven by a forced unwind of leveraged ETF and hedge fund positions that JPMorgan estimates is more than halfway complete.
"The correction, which began with typical fundamental concerns and sector rotation, was amplified through leveraged ETFs, and recently we are seeing strong signs of position liquidation by hedge funds," analysts including Mixo Das at JPMorgan said in a July 21 report. The bank maintained its overweight rating on South Korea with a 12-month KOSPI target of 12,500.
Leveraged ETF assets tracking Korean equities have shrunk to about $26 billion from $50 billion at end-June, representing roughly 75% of the necessary deleveraging toward JPMorgan's estimated $18 billion equilibrium level. Hedge fund long-short ratios on the bank's prime book have fallen from above 5.5 times to below 4 times, with more than half of the deleveraging complete. Foreign outflows this year have exceeded $110 billion, with about 90% concentrated in Samsung Electronics and SK Hynix as their MSCI Emerging Markets index weights triggered passive selling.
The speed and scale of the unwind has left the KOSPI vulnerable to further volatility — the Korea Volatility Index ratio versus the VIX stands near 5 times, versus a normal level of about 1 time — but JPMorgan argues the fundamental case for Korean equities remains intact. The bank's 12,500 target implies roughly 50% upside from current levels, contingent on AI demand holding up, concentrated foreign selling continuing to ease, and regulatory tightening not choking off retail participation entirely.
Leveraged ETF Bubble Deflates as Regulators Step In
The leveraged ETF market has been the primary amplifier of KOSPI volatility. At its June peak, Korean asset-linked leveraged ETF AUM reached $50 billion — roughly four times the U.S. level relative to market size, per JPMorgan. As the selloff deepened, forced deleveraging created a self-reinforcing cycle of falling prices and position liquidations.
South Korean regulators have moved to prevent a repeat. Starting Aug. 5, the minimum deposit for single-stock leveraged products will rise to 30 million won ($22,600) from an effective 3 million won. From Aug. 19, only cash will count toward initial margin. By November, the minimum trading unit will increase from one share to 20 shares. New listings of single-stock leveraged ETFs have been suspended. The measures limit the speed at which leveraged capital can return, even if retail sentiment recovers.
Foreign Selling Concentrated, Not Systemic
The $110 billion in year-to-date foreign outflows looks alarming in aggregate, but JPMorgan's analysis shows the selling is overwhelmingly passive and concentrated. Samsung Electronics and SK Hynix alone account for about 90% of the outflow, driven by their outsized weights in the MSCI Emerging Markets index triggering mandatory rebalancing by benchmark-constrained funds. Those weights have already fallen — Samsung from 9.5% to 7.5% and SK Hynix from 8.3% to 5.7% since end-June — reducing the forced selling pressure. JPMorgan views this as a mechanical adjustment rather than a loss of confidence in Korean assets.
Earnings Momentum Remains Upward
Despite the price collapse, analyst earnings revisions for Korean companies continue to rise. The 2026 EPS estimate for the KOSPI has been revised up 143.4% over the past six months, with the tech sector up 215.5% and industrials up 91%, supported by AI-related demand for high-bandwidth memory, data center construction, and industrial equipment. The risk is that the fundamental support is narrowly concentrated. If AI capital expenditure slows or new technologies reduce the need for high-end memory, the earnings upgrades that underpin JPMorgan's 12,500 target could face renewed scrutiny.
This article is for informational purposes only and does not constitute investment advice.
