JPMorgan: Korea’s stock market deleveraging process is already 75% complete; continue to maintain an “overweight” rating

According to Golden Finance, on July 21, JPMorgan Chase said that forced deleveraging driven by leveraged ETFs is the main reason behind the recent plunge of South Korea’s KOSPI index. The institution’s analysis suggests that the liquidation of leveraged fund positions, rather than deteriorating corporate earnings or fundamentals, has amplified market volatility. It is expected that the assets of leveraged ETFs have already shrunk to about $26 billion, and that the deleveraging process has currently been completed by about 75%. South Korea’s corporate fundamentals remain solid, but the heavy deleveraging pressure is dragging down stock prices. The institution predicts that stronger regulatory measures—such as South Korea’s financial authorities raising base deposit margin requirements and pausing the listing of additional leveraged ETFs for individual stocks—will further accelerate the deleveraging process.

The report also assessed that hedge fund leverage is being reduced rapidly as well. JPMorgan said the size of long/short positions managed by hedge funds has fallen from more than 5.5 times net assets to less than 4 times, estimating that deleveraging is already more than halfway complete. This year, net foreign selling of South Korean stocks is expected to exceed $110B, but about 90% is concentrated in storage semiconductor stocks; with the recent decline in the weighting of storage equities, foreign selling pressure is gradually easing. The bank remains optimistic about the medium- to long-term outlook. AI investment and data center investment remain steady; the slowdown in demand for storage chips has not been confirmed. Improved profitability in the industrial, financial, and consumer goods sectors, as well as better corporate governance structures, are also positive factors for South Korea’s stock market. JPMorgan maintains its “overweight” rating for the South Korea stock market and expects a 12-month target price for the KOSPI index of 12,500 points, consistent with its previous view. Its benchmark scenario target is 12,500 points; the bull market scenario is 15,000 points; and the bear market scenario is 8,000 points. (Jin Shi)