JPMorgan Chase points out that forced deleveraging driven by leveraged ETFs is the main reason for the recent plunge in South Korea's KOSPI index. The firm's analysis suggests that the liquidation of leveraged fund positions, rather than deteriorating corporate earnings or fundamentals, amplified market volatility.
Leveraged ETF assets are estimated to have shrunk to approximately $26 billion, with the deleveraging process now about 75% complete.
While South Korean corporate fundamentals remain robust, strong deleveraging pressure has dragged down stock prices. The firm predicts that stronger regulatory measures by South Korean financial authorities, such as raising basic deposit margin requirements and suspending new listings of single-stock leveraged ETFs, will further accelerate the deleveraging process.
The report also assesses that hedge fund leverage is rapidly decreasing. JPMorgan Chase states that the size of long-short positions managed by hedge funds has decreased from over 5.5 times net assets to less than 4 times, estimating that deleveraging is more than halfway complete. Foreign net selling of South Korean stocks this year is expected to exceed $110 billion, but about 90% of this is concentrated in memory semiconductor stocks. With the recent decline in the weighting of memory stocks, the selling pressure from foreign investors is gradually easing. The bank remains optimistic about the medium- to long-term outlook. AI and data center investments remain robust, while a slowdown in memory chip demand has not yet been confirmed. Improved profitability in the industrial, financial, and consumer goods sectors, as well as improved corporate governance, are also positive factors for the South Korean stock market.
JPMorgan Chase maintains its "overweight" rating on South Korean stocks and maintains its 12-month target price of 12,500 points for the KOSPI index, consistent with its previous forecast. Its baseline scenario target is 12,500 points, its bullish scenario target is 15,000 points, and its bearish scenario target is 8,000 points.
