JPMorgan turns bullish against the trend: KOSPI plunges more than 24% month-over-month—Is the rebound in Korean stocks real, or just a false dawn?

As of Beijing time on July 22, KOSPI closed at 6,843.48 points, up 1.42% on the day, but over the past month the index’s cumulative decline has reached as much as 24.92%. If the timeline is extended, since KOSPI hit its intra-year high in June this year, its largest drawdown has already approached 28% to 29%. Just as the market fell into panic, JPMorgan instead released a report that went against the trend: it not only maintained an “overweight” rating on Korean equities, but also set a 12-month target price of 12,500 points. This sharp contrast has pulled investors’ attention back to a core question: is the plunge in Korean equities a violent shakeout during a bull-market process, or the opening act of a further decline?

Deleveraging storm: an adjustment driven by liquidity rather than fundamentals

To understand JPMorgan’s optimistic outlook, the first step is to dissect the underlying drivers behind this round of KOSPI’s decline. From a data perspective, this adjustment has the typical hallmarks of “deleveraging,” which bears many similarities to the liquidity freeze caused by the COVID-19 shock in March 2020, rather than the balance-sheet contraction seen during the 2008 Lehman crisis.

The key observable indicator lies in the leveraged exchange-traded fund (ETF) market. Data show that the size of the Korea leveraged ETF market has sharply shrunk from its peak period’s $50 billion to $26 billion recently, nearly cutting in half. This change implies that the market has digested a massive amount of passive selling in the short term. Meanwhile, foreign capital outflows from Korean equities have exceeded $110 billion, setting a historical high. This scale of capital flight, combined with the decline in the long/short fund ratio and the release of forced-closure pressure, jointly forms the main driving force behind this round of the drop.

JPMorgan’s conclusion thus has solid logic support: this KOSPI adjustment, in essence, is a crowded-trade correction after the wave of the artificial intelligence bubble—not a rational withdrawal by investors due to a worsening of South Korea’s economic fundamentals. A decline triggered by liquidity contraction often creates “golden pits” for core assets with real competitiveness.

Risk-clearing process: signals of a sell-pressure exhaustion and its limits

Whether the pressure from deleveraging is near the end is crucial for judging the short-term market bottom. Although the leveraged ETF market size of $26 billion has already fallen sharply compared with the high point, we still need to prudently assess the risk of remaining exposures. The current decline in the long/short ratio and persistent high volatility indicate that hedge funds are still lowering their risk appetite, meaning volatility-driven selloffs triggered by macro uncertainty may not have fully ended.

However, a positive signal is emerging: the negative feedback loop that results from forced liquidations is being broken. Once leverage capital is largely cleared, the “inertia” of market selling will weaken significantly. While it’s not impossible for KOSPI in the short term to still test prior lows, from a risk-reward perspective, the most intense leg of the main selloff has most likely already passed. For medium- to long-term capital, the valuation trough created by deleveraging is taking shape.

Three core drivers of future upside

JPMorgan’s target price of 12,500 points still leaves substantial room for upside versus current levels. Realizing this forecast depends on the resonance of the following three key logics:

First is the spillover effect from artificial intelligence-related capital expenditures. As a core node in the global semiconductor supply chain, Korean equities are highly sensitive to the investment cycle for AI infrastructure. Even though the market has adjusted recently, the capital expenditure competition among global tech giants in the artificial intelligence arena has not stopped. Companies in areas such as Korea’s memory chips and high-bandwidth memory will continue to benefit from this structural trend, and earnings forecasts for related sectors are expected to be upgraded in the second half of the year.

Second is the bottoming and rebound of the semiconductor cycle. The semiconductor industry has a distinct cyclical nature. At present, as inventory digestion is entering its end phase and replacement demand driven by edge applications such as AI smartphones and AI personal computers ramps up, the global semiconductor cycle is gradually moving out of the trough. The semiconductor sector has a very high weight within KOSPI, so the cycle reversal will provide the most direct earnings support to the index.

Finally is corporate governance reform in South Korea. Improving shareholder returns and corporate governance structures is the long-term direction of the South Korean government’s push for capital-market reforms. During periods of market weakness, Korean blue chips characterized by low valuations and high dividend yields are likely to strengthen their willingness to repurchase and cancel shares, providing a solid safety cushion for the stock price. Once foreign investors believe the institutional discount applied to the Korean market is starting to narrow, the large-scale capital that exited earlier may accelerate its return.

Conclusion: anchoring value amid uncertainty

Overall, Korean equities are currently in a typical period of pain driven by liquidity contraction. While the trend reversal of foreign capital returning still requires waiting for the Federal Reserve’s policy path to become clearer, the current pricing of KOSPI already reflects, to a relatively full extent, macro pessimistic expectations and deleveraging pressures. Historical experience suggests that a selloff driven by leverage clearing rather than an economic crisis is often accompanied by an extremely sharp valuation-repair rally.

For investors, during the spread of panic, understanding the essence of the decline is more important than predicting short-term price levels. The long-term investment logic for Korean equities—namely its pivotal position in the global AI industry chain—has not been fundamentally shaken. As deleveraging pressure is gradually released, the market will re-examine the upside potential of the semiconductor cycle and the long-term value brought by corporate governance reforms. KOSPI’s path to resurgence may be quietly taking shape underfoot.

Frequently Asked Questions

Q: What logic is JPMorgan’s 12,500-point KOSPI target price mainly based on?

A: The target price is mainly based on two logics. First, it believes the current decline is a liquidity shock rather than a fundamental crisis, and that as leverage is cleared, the market has strong momentum for mean reversion. Second, it is optimistic about the continued pull of global AI capital expenditures on Korea’s semiconductor industry, and about the systematic valuation uplift for blue-chip stocks brought by corporate governance reform; it expects earnings and valuations to achieve a dual repair.

Q: Has the deleveraging process after the plunge in Korean equities truly ended?

A: Not completely, but the most intense phase has already passed. The size of the leveraged ETF market has fallen from $50 billion to $26 billion, indicating that passive selling pressure has been greatly released. While active funds such as hedge funds are still adjusting their risk exposures, the negative feedback spiral triggered by forced liquidations has been broken, and sell pressure is shifting from “panic-driven” to a “structural” adjustment.

Q: If foreign capital outflows exceeded $110 billion, will they come back?

A: The key to foreign capital returning depends on a shift in Federal Reserve policy and stabilization in the exchange rate. As a typical outward-looking market, Korean equities are highly sensitive to global liquidity. Once the US dollar weakens or the South Korean government rolls out more aggressive market reform measures, the capital that exited heavily earlier may return first due to Korean equities’ high elasticity.

Q: Besides semiconductors, what other KOSPI sectors are worth watching?

A: Besides semiconductors, software services and data-center infrastructure sectors that benefit from advances in AI technology are also worth attention. Meanwhile, under expectations of low interest rates, traditional blue chips with high dividend yields—such as banks and automakers—also stand out as high-quality choices in the current market environment, given their strong defensive attributes and valuation re-rating expectations driven by reforms.

Q: What is the biggest risk in investing in Korean equities now?

A: The biggest risk is a global macro “hard landing.” If the US economy suffers an unexpected recession, it would seriously hit Korean exports, and even if deleveraging ends, the real deterioration in corporate earnings would still drag down KOSPI. In addition, geopolitical risk and large fluctuations in exchange rates are also systemic variables that cannot be ignored when investing in Korean equities.