JPMorgan: KOSPI plunges 28%, leverage liquidation bullish

After the KOSPI plunged 28%, leveraged position liquidations have cleared out more than 70%. JPMorgan maintains an Overweight rating and a 12-month target of 12,500 points, but tighter regulation and doubts over AI demand still limit upside for the rebound.
(Background: Morgan Stanley cuts Korea stocks—KOSPI’s pessimistic target to 6,000 points: leveraged ETFs fueled the rally, but the market is now exhausted and trading is sluggish.)
(Additional context: Korea stocks fell 5% in a single day! Morgan Stanley cut the pessimistic target to 6,000 points, while Goldman Sachs and Moody’s also turned bearish)

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• KOSPI collapses 28%: JPMorgan maintains Overweight
• Leveraged ETFs freeze up: $50 billion down to $26 billion
• Hedge funds deleverage: long/short ratio falls below 4x
• Foreign outflows are brutal: $110 billion concentrated selling of Samsung
• Regulation clamps down on leverage: single-stock products suspended
• Profit surge expectations: EPS raised by 143.4%

In a research note dated July 21, JPMorgan estimates that the Korean KOSPI index has fallen about 28% from the June 22 peak. Leveraged ETFs and hedge-fund positions have contracted sharply, but the bank still maintains an Overweight stance on the Korean market. The 12-month KOSPI benchmark target remains at 12,500 points.

The main thrust of this view is not a simple bet on a rebound, but interpreting this sharp drop in Korean equities as a leveraged “stampede” and concentrated position readjustments. Using JPMorgan’s framework, the size of leveraged ETFs tracking Korean underlyings has fallen from about $50 billion at the end of June to the current $26 billion, achieving roughly 75% deleveraging. The deleveraging progress in equity hedge funds is also above half. Total foreign outflows over the year exceed $110 billion, with about 90% coming from the two major memory names, Samsung Electronics and SK Hynix.

However, position reduction does not mean the market has already returned to calm. Volatility in the Korean equity market remains elevated: the VKOSPI-to-VIX ratio is close to 5x, versus around 1x in normal times. Tight swap capacity, tighter regulation on leveraged products for single stocks, and whether AI demand can continue to support memory and industrial-chain demand are still the boundary conditions that determine whether this adjustment truly reaches its end.

This round of decline in the Korean stock market has already been severe enough. The KOSPI logged a record closing high of 9,114.55 points on June 22, and by early July it is already down more than 20% from the peak. If measured around the roughly 6,516 points seen around July 21, the drawdown from the peak is about 28.5%.

JPMorgan’s 12,500-point target depends on the idea that this pullback is not a sudden fundamental collapse, but rather crowded trades that were previously overextended getting squeezed out. Earlier, the Korean market saw a rapid rally driven by expectations of an AI and memory upcycle, plus company governance reforms. Some capital amplified exposure through leveraged ETFs, swaps, and long/short fund positioning. As volatility rose, closing positions and redemptions in turn intensified the selloff.

KOSPI plunges 28%: JPMorgan maintains Overweight

A price-momentum factor retracing nearly -26% over four weeks points to the same issue: the stocks that rose most strongly earlier—where capital became most crowded—are under more pressure now.

But volatility itself has not yet normalized. The VKOSPI-to-VIX ratio is close to 5x, indicating that local Korean market volatility is far higher than in the U.S. Position pressure is shrinking, but price swings could still amplify in the near term.

The clearest liquidation is happening in leveraged ETFs.

JPMorgan estimates that the asset size of leveraged ETFs tracking Korean underlyings fell from about $50 billion at the end of June to the current $26 billion, with deleveraging progress of about 75%, approaching the $18 billion size the bank considers more acceptable.

This figure cannot be simply interpreted as investors mass redeeming. Over the same period, cumulative capital inflows remain positive; the reduction in size mainly comes from the decline in the underlying markets. In other words, net subscriptions have not completely disappeared, but the price drop has already caused the leveraged exposure to contract passively.

Leveraged ETFs freeze up: $50 billion down to $26 billion

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

This is also why JPMorgan believes deleveraging has made substantive progress. If leveraged product size continues to stay at a high level, every market pullback could trigger additional forced selling. After the size is cut in half, the amplifying effect of the same price volatility on downstream sell pressure would weaken.

Looking sideways, retail-guaranteed-financing capital in Korea is not extremely high by itself. The research note’s stated figures show that Korean margin balances are about $21 billion, or 0.5% of the total market capitalization. Leveraged ETFs are about $26 billion, or 0.7% of total market cap. By comparison, U.S. margin balances are about 1.9% of market cap, while leveraged ETFs are about 0.3%. In China’s A-shares, margin balances account for about 2.8% of the ratio, and leveraged ETFs account for nearly 0.

Korea margin balances: $21 billion = 0.5% of market cap; leveraged ETFs: $26 billion = 0.7%.

This comparison suggests the problem in the Korean market is not unusually high margin balances, but rather the outsized presence of leveraged ETFs. Retail investors remain an important buyer in Korea’s equity market. Since June, among overseas stock purchases, multiple leveraged products have still ranked near the top. Sentiment has not completely cooled—rather, the pullback and regulatory expectations have first compressed leveraged product size.

Hedge funds deleverage: long/short ratio falls below 4x

The second liquidation signal comes from hedge funds.

JPMorgan’s Prime book shows that deleveraging progress by equity hedge funds is already above 50%. The long/short ratio, which was above 5.5x at the peak, has fallen to below 4x. This suggests that some of the exposure built up over the past year during Korea’s fast rally has already been reduced.

A roughly 28% index drop indicates prices have already adjusted. Meanwhile, the long/short ratio shrinking indicates that the fuel for “forced selling” is also diminishing. If the long/short ratio continues to fall, the follow-on chain selling pressure caused by overfilled positioning should be lower than the state seen at the end of June.

But below 4x does not mean everything is fully back to normal. Deleveraging is still not at the level of normal times, and tight swap capacity and abnormal volatility have not completely disappeared either. In markets with high concentration like Korea, once financing channels narrow, drawdowns in popular stocks can be amplified—especially core positions previously supported by AI and the memory supply chain.

“Deleveraging 75%” also cannot be directly equated with a bottom call. The market can fall back from the most crowded positioning, but as long as volatility remains high and financing stays tight, the remaining positions could still amplify drawdowns on certain trading days.

Foreign outflows are brutal: $110 billion concentrated selling of Samsung

The structure of foreign fund flows matters more than the total amount.

Per JPMorgan’s July 21 research note, foreign investors have net sold Korean equities by more than $110 billion year-to-date, with about 90% of that coming from Samsung Electronics and SK Hynix. Under a comparable definition cited in public reports for late June, the figure was about $95 billion; the number afterward may have been updated as the market fell and foreign investors sold.

This kind of concentrated outflow differs from a full withdrawal from Korea. The weights of the two major memory stocks in the MSCI EM index fell from 9.5% and 8.3% at the end of June to 7.5% and 5.7%, respectively. After the weight reduction, pressures on funds constrained by authorization limits, benchmark weights, or concentration levels to keep selling should ease somewhat.

Foreign outflows exceed $110B YTD, with about 90% coming from the two major memory stocks.

This is also one of the reasons JPMorgan still maintains its Overweight on Korea. If foreign investors were broadly selling Korean assets, the issue would be closer to a systematic confidence contraction. If the sell pressure is mainly concentrated in two memory stocks with overly high weights, then as those weights decline and position constraints ease, the way the market absorbs pressure would be different.

Regulators clamp down on leverage: single-stock products suspended

Risk is also concentrated here. Korea’s core support still ties to AI capital expenditure, data center construction, and high-end storage demand. If the market starts to doubt the sustainability of AI compute investment, or if technical expectations emerge that would lower demand for high-end storage, Samsung Electronics and SK Hynix would still become amplifiers for foreign outflows and for index volatility.

Korean regulators have already begun cooling high-leverage trading.

On July 16, the Financial Services Commission (FSC) announced and confirmed a pause on the launch of new single-stock leveraged, inverse, and covered call products. The minimum deposit requirement will be raised from 10 million KRW to 30 million KRW, expected to take effect on August 5. Starting August 19, initial margin will count only cash. From November onward, the proposed minimum trading unit for listed single-stock leveraged products in Korea will rise from 1 share to 20 shares.

These measures are not aimed at all leveraged ETFs, but specifically at single-stock leveraged products. The impact is also not about immediately pushing up the index. Instead, it constrains leveraged products from rapidly re-inflating. Even if retail sentiment remains strong, the space for funds to quickly amplify exposure again through small trades and non-cash margin would be reduced.

This explains why JPMorgan is bullish on Korea while still emphasizing the effectiveness of regulation. If regulation is only a short-term suppression, leveraged funds could rebuild exposure through other products or markets. If the new rules keep applying, the volatility-amplification mechanism in Korea’s equity market would weaken.

Profit surge expectations: EPS raised by 143.4%

Another reason JPMorgan stays optimistic is that Korea’s earnings expectations are still being revised upward.

The research note shows that Korea’s 2026 EPS has been raised by 143.4% over the past six months, with the technology sector up 215.5% and the industrial sector up 91.0%. Even with sharp price pullbacks, analysts’ revisions to future earnings remain strong—especially concentrated in AI-related technology and industrial-chain names.

Korea 2026 EPS raised 143.4% over six months; tech sector up 215.5%; industrial sector up 91.0%.

Factors supporting these upgrades include massive-scale compute investment, data center construction, spending on safety and resilience, and medium- to long-term expectations for Korea’s corporate governance reforms. For Korea’s market, memory, servers, industrial equipment, and related supply chains remain the most direct beneficiaries.

Risks also come from the same direction. The fundamental pillar of this Korea market cycle relies heavily on the AI cycle. If AI capex slows down, or if new technologies reduce demand for high-end memory and related hardware, the upward earnings revisions could be revisited. The relative weakness of sectors like materials and consumer names also indicates that the Korean market is not improving across all industries in sync.

JPMorgan’s 12,500-point target is built on a package of conditions: deleveraging via leveraged products continues, AI demand is not disproven, and concentrated selling pressure from foreign investors eases. What can be said now is that the most crowded positions in Korea have clearly loosened. What cannot yet be said is that volatility has returned to normal, that foreign investors have turned into sustained net re-flows, or that earnings upgrades along the AI chain have been fully locked in.