JPMorgan Remains Bullish on Korean Stocks: Leverage Pressure Has Been Significantly Released, Maintains Overweight Rating

On July 21, JPMorgan stated in its latest report on Korean stock strategies that the fundamentals of the Korean market remain solid. The recent sharp decline in the KOSPI is primarily the result of high-leverage funds being cleared, passive reductions in leveraged ETFs, and adjustments in hedge fund positions. The bank maintains an overweight rating on the Korean market, with a 12-month KOSPI target of 12,500 points.

The report noted that the KOSPI has fallen about 28%-29% from its peak on June 22. The initial adjustment stemmed from concerns over conventional fundamentals and capital rotation, but as volatility increased, positions in leveraged ETFs, long-short equity funds, and macro funds began to be forced to compress, further amplifying the market decline. JPMorgan believes this resembles a deleveraging of crowded trades rather than a systemic reversal of the logic behind Korean assets.

In terms of deleveraging progress, pressure has been significantly released. JPMorgan estimates that the scale of related leveraged ETFs in Korea has dropped from a peak of about $50 billion to approximately $26 billion, representing about 75% of the deleveraging progress; long-short equity funds have completed more than half of their deleveraging, with the long-short ratio in the JPM Prime book falling from a peak of over 5.5 times to below 4 times.

Retail leverage has also not posed a systemic risk. The financing balance in Korea has decreased from a peak of over $25 billion to about $21 billion, accounting for only 0.5% of the total market capitalization, which is significantly lower than levels in the U.S. and China’s A-shares. The report states that financing pressure is mainly concentrated in the small-cap KOSDAQ market, with limited impact on large-cap KOSPI stocks.

Regarding foreign capital outflows, over $110 billion has flowed out of Korea year-to-date, with about 90% coming from two leading storage companies. JPMorgan believes that this selling pressure does not entirely reflect a bearish view on fundamentals, but is due to the previous excessive weight of these stocks in the MSCI EM index, which triggered some long-term funds' position limits. As stock prices have retreated and index weights have decreased, the forced selling pressure has eased.

On the fundamental side, JPMorgan remains optimistic about Korea's mid-term prospects. The report states that global AI spending, security and resilience spending, the wealth effect for businesses and households, and reforms in corporate governance in Korea will continue to support the Korean stock market. Although the market has recently questioned the monetization of AI models, the economic viability of data center leasing remains strong at the cloud vendor level, and the momentum for hyperscalers to invest in AI infrastructure has not waned.

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