According to Chaoxiang Research, a J.P. Morgan report dated July 29 noted that the Korean KOSPI index has declined nearly 40% since its peak on June 22, with leveraged ETF assets shrinking from $50 billion to $17 billion and hedge fund long-short ratios falling from 5.7x to 3.2x, indicating that deleveraging has exceeded 90%. The KOSPI’s forward P/E ratio has dropped to 5x, reaching crisis-level valuations. Foreign investors have cumulatively net sold over $110 billion, but 90% of this selling was concentrated in two leading memory chip giants. As their weights in the MSCI Emerging Markets Index decreased from 9.5% and 8.3% to 6.5% and 4.5%, respectively, passive selling pressure has significantly eased. J.P. Morgan believes that, combined with attractive valuations, the clearance of positions has opened a window for valuation recovery in the Korean stock market, and recommends favoring sectors tied to wealth effects, biopharmaceuticals, preferred stocks, and banking stocks.
JPMorgan: KOSPI Enters Valuation Recovery Window After 40% Decline
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Summary
JPMorgan says the KOSPI has entered a valuation recovery window following a 40% decline from its June 22 peak. Leveraged ETFs contracted from $500 billion to $170 billion, and the hedge fund long-short ratio dropped to 3.2x. The KOSPI’s forward P/E fell to 5x, a level indicative of a crisis. Foreign investors sold $110 billion worth of shares, primarily in two memory chip companies. With excessive leverage reduced and valuations at historic lows, the risk-reward profile now favors value investing in both crypto and Korean equities. JPMorgan is bullish on wealth-effect sectors, biopharma, preferred stocks, and banking.
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