Selling Pressure on Korean Stocks Eases as Multiple Institutions Maintain Overweight
nashnova research
KOSPI fell roughly 20% in July — its worst month since 2008 — but JPMorgan, BofA, and TS Lombard say the sell-off is nearing exhaustion, maintaining overweight and framing Korea as a lead indicator for US tech.
Was this a fundamental breakdown or a leverage blowup?
JPMorgan classified the sell-off as a liquidity shock, not a deterioration in fundamentals. This means → companies are still earning; the crash was driven by leveraged funds forced to liquidate simultaneously.
Since the June 22 peak, KOSPI has pulled back roughly 26%, driven by leveraged-ETF deleveraging, hedge-fund unwinds, and passive foreign outflows.
In plain terms = the plumbing broke, not the economy.
How extreme did the leveraged-ETF bubble get?
At the late-June peak, leveraged ETFs benchmarked to Korean assets hit $50 billion in AUM — roughly 4× the US-equivalent ratio relative to market size.
These products created a textbook positive-feedback loop: buying into rallies, selling into declines. Korea's fear gauge spiked to nearly 5× the US VIX, versus a normal ratio of about 1×. This means → the leverage structure amplified panic far beyond what fundamentals warranted.
Forced liquidations have since shrunk leveraged-ETF AUM from $50 billion to roughly $26 billion. JPMorgan estimates the deleveraging is about 75% complete.
What has the regulator done to hit the brakes?
Korean regulators are tightening in stages: from August 5, minimum account size rises from ₩10 million to ₩30 million; from August 19, initial margin must be in cash only.
From November, the minimum trade size for single-stock leveraged products jumps from 1 share to 20 shares, and new single-stock leveraged ETF listings are suspended.
In plain terms = regulators are raising the bar so retail traders can no longer use pocket change to run outsized leverage — squeezing the bubble at its source.
$110 billion in foreign outflows — will they continue?
Korean equities have seen more than $110 billion in foreign outflows year-to-date, an all-time record for a single Asian market.
JPMorgan stresses that roughly 90% of the outflows were concentrated in two memory-chip giants, driven by passive rebalancing under MSCI EM index weight caps — not active selling. This means → foreigners were not turning bearish on Korea; index rules forced them to sell once weights exceeded limits.
As prices corrected, the two companies' MSCI EM weights fell from 9.5% and 8.3% to roughly 7.5% and 5.7%, materially reducing the passive selling pressure.
Why do multiple houses say the worst is nearly over?
TS Lombard framed the decline as semiconductor-stock deleveraging, not a broader market crash, noting that current prices already reflect roughly 45% normalization in memory-chip earnings next year.
BofA flagged a technical signal: the broad market's decline has, for the first time since March, exceeded the decline in its large-cap leaders — and the March instance marked a cyclical bottom. This reflects a shift from indiscriminate liquidation to selective adjustment, a classic sign of easing pressure.
JPMorgan maintains its overweight on Korean equities with a 12-month KOSPI target of 12,500.
Why is Korea treated as a lead indicator for US tech?
Korea's market is heavily exposed to memory chips — widely seen as a core beneficiary of AI infrastructure buildout. Put simply = the global AI boom needs data centers, data centers need massive amounts of memory, and Korea is the largest supplier.
JPMorgan sees hyperscaler data-center ROI still running high, with no visible slowdown in capex plans and no signs of actual memory-demand decline across the supply chain.
Despite July's sharp pullback, KOSPI is still up roughly 60% year-to-date in 2026. Whether deleveraging runs its course on schedule and whether the AI capex cycle holds will be the key tests for the 12,500 target.
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