TL;DR
JPMorgan says the KOSPI has fallen about 28% from its June high but maintains an overweight rating on South Korea and a target of 12,500.
· Leveraged ETF assets are estimated to have declined from approximately $50 billion to $26 billion, and hedge funds have also reduced their leverage by more than half.
Selling pressure is concentrated on Samsung Electronics and SK Hynix, and tighter regulations on single-stock leveraged products will continue to limit rebound potential.

In a research report on July 21, JPMorgan estimated that the South Korean KOSPI index has declined approximately 28% from its peak on June 22, with significant reductions in leveraged ETF and hedge fund positions; however, the bank still maintains an overweight stance on the South Korean market and keeps its 12-month KOSPI target at 12,500.

The core of this analysis is not simply betting on a rebound, but rather interpreting South Korea’s recent sharp market decline as a leveraged sell-off and a realignment of concentrated positions. According to JPMorgan Chase, the size of leveraged ETFs targeting Korean assets has declined from approximately $50 billion at the end of June to $26 billion today, representing about 75% of the deleveraging completed. Equity hedge funds have also reduced leverage by more than half. Foreign outflows this year have exceeded $110 billion, with approximately 90% originating from Samsung Electronics and SK Hynix, the two dominant memory chip stocks.

However, a reduction in positions does not mean the market has returned to calm. Korean stock market volatility remains elevated, with the VKOSPI-to-VIX ratio nearing five times its normal level of approximately one. Tight swap capacity, tighter regulation of single-stock leveraged products, and whether AI demand can continue to support memory and industrial supply chains remain the key boundaries determining whether this correction is truly nearing its end.

The decline has been steep, but the selling pressure resembles a position rush.

South Korea's stock market has experienced a sufficiently sharp decline. The KOSPI reached a record closing high of 9,114.55 on June 22, and by early July, it had fallen more than 20% from that peak. Calculating from around 6,516 points on or around July 21, the decline from the peak is approximately 28.5%.

JPMorgan Chase maintains its 12,500-point target on the premise that this downturn is not due to a sudden collapse in fundamentals, but rather the concentrated unwinding of previously overcrowded trades. The Korean market had previously surged rapidly, driven by expectations around AI, the memory upcycle, and corporate governance reforms, with some capital amplifying exposure through leveraged ETFs, swaps, and long-short fund positions. As volatility increased, liquidations and redemptions further exacerbated the decline.

The four-week pullback of the price momentum factor, nearing -26%, also points to the same issue: stocks with the strongest prior gains and the highest levels of capital inflow are under the most pressure.

However, volatility itself has not yet normalized. The VKOSPI-to-VIX ratio is close to 5, indicating that volatility in the Korean market remains significantly higher than in the U.S. market. While position pressure is declining, price swings may still be amplified in the short term.

Leveraged ETFs decreased from $50 billion to $26 billion.

The most prominent liquidations occurred in leveraged ETFs.

JPMorgan estimates that the assets under management of South Korea-targeted leveraged ETFs have declined from approximately $50 billion at the end of June to $26 billion currently, representing a reduction of about 75% and nearing what it considers a more acceptable level of $18 billion.

This figure cannot be simply interpreted as large-scale redemptions by investors. Cumulative fund inflows during the same period remain positive; the decline in scale is primarily due to a drop in the underlying market. In other words, net subscriptions have not disappeared entirely, but the price decline has led to a passive reduction in leverage exposure.

Leveraged ETF AUM decreased from approximately $50 billion to $26 billion, but cumulative fund flows remain positive.

This is also why JPMorgan believes meaningful progress has been made in deleveraging. If the scale of leveraged products remains high, each market decline could trigger additional passive selling. After the scale is halved, the same price movements will have a diminished amplifying effect on subsequent selling pressure.

Looking horizontally, South Korean retail margin financing is not extreme. According to the data cited in the report, South Korea’s margin balance is approximately $21 billion, accounting for 0.5% of total market capitalization. Leveraged ETFs amount to about $26 billion, or 0.7% of total market capitalization. In comparison, U.S. margin balances account for approximately 1.9% of market capitalization, while leveraged ETFs make up about 0.3%. In China’s A-share market, margin balances represent around 2.8% of market capitalization, with leveraged ETFs accounting for nearly 0%.

South Korea's margin balance is $21 billion, accounting for 0.5% of market cap; leveraged ETFs amount to $26 billion, or 0.7%.

This comparison shows that the issue in the Korean market is not abnormally high margin balances, but rather the disproportionately high presence of leveraged ETFs. Retail investors remain significant buyers in the Korean stock market, and several leveraged products still rank highly in overseas stock purchases since June. Sentiment has not fully cooled; rather, price declines and regulatory expectations have initially reduced leverage levels.

Hedge fund selling pressure has also decreased, but has not yet returned to normal levels.

The second clearing clue comes from a hedge fund.

JPMorgan Prime Book data shows that equity hedge funds have reduced leverage by more than 50%, with the long/short ratio falling from a peak of over 5.5x to below 4x. This indicates that capital deployed during Korea’s rapid rally over the past year has significantly reduced its exposure.

A 28% decline in the index indicates that prices have already adjusted, and the decreasing long/short ratio suggests that the fuel for "forced selling" is also diminishing. If the long/short ratio continues to fall, the subsequent chain reaction of selling pressure caused by over-leveraged positions will be lower than it was at the end of June.

However, leverage below 4x does not equate to a fully normal state. The de-leveraging process still has room to go, and pressures on swap capacity and abnormal volatility have not fully subsided. In markets like Korea, where concentration is high, a narrowing of funding channels can amplify drawdowns in popular stocks, particularly core positions previously supported by the AI and memory chains.

“75% liquidation” cannot be directly equated to a bottom confirmation. The market can retreat from its most crowded state, but as long as volatility remains high and funding remains tight, the remaining positions may still amplify losses on certain trading days.

Foreign selling pressure is concentrated on two major memory stocks.

The structure of foreign capital flows is more important than the total amount.

According to the research report by Massage Gen Da Tong dated July 21, foreign capital has net withdrawn over $110 billion from the Korean stock market this year, with approximately 90% coming from Samsung Electronics and SK Hynix. Public reports as of late June indicated a similar figure of around $95 billion; the subsequent figure may have been updated due to market declines and further foreign selling.

This concentrated outflow differs from a broad exit from South Korea. The weights of the two major memory stocks in the MSCI EM Index have declined from 9.5% and 8.3% at the end of June to 7.5% and 5.7%, respectively. Following this reduction in weights, the selling pressure on funds constrained by authorization limits, benchmark weights, or concentration restrictions has eased.

Over $110 billion in foreign capital outflows occurred this year, with approximately 90% coming from two memory stocks.

This is also one of the key reasons JPMorgan continues to maintain an overweight position in Korea. If foreign investors were selling off Korean assets broadly, the issue would more closely resemble a systemic loss of confidence. However, if the selling pressure is concentrated primarily on two memory stocks with excessively high weights, the market’s pressure dynamics will differ as their weights decline and position limits ease.

Risk is also concentrated here. The core support for the Korean market remains tied to AI capital expenditures, data center construction, and demand for high-end memory. Should the market begin to question the sustainability of AI computing investments or anticipate technological developments that reduce demand for high-end memory, Samsung Electronics and SK Hynix will continue to act as amplifiers for foreign capital flows and index volatility.

Leveraged products on single stocks have been tightened, and leverage is unlikely to make a quick comeback.

South Korean regulators have begun to cool down high-leverage trading.

On July 16, the Financial Services Commission of Korea announced the suspension of new listings for single-stock leveraged, inverse, and covered call products. The minimum deposit requirement will be increased from KRW 10 million to KRW 30 million, effective August 5. Starting August 19, initial margin will be calculated in cash only. Beginning in November, the minimum trading unit for listed single-stock leveraged products in Korea is planned to increase from 1 share to 20 shares.

These measures do not target all leveraged ETFs, but are focused on single-stock leveraged products. The impact is not an immediate spike in the index, but rather a restriction on the repricing of leveraged products. Even if retail sentiment remains strong, the ability for capital to quickly expand exposure through small trades and non-cash margin will be reduced.

This explains why JPMorgan remains bullish on Korea while still emphasizing the impact of regulation. If regulation only temporarily suppresses leverage, leveraged funds may accumulate again through other products or markets. If the new rules remain effective, the mechanisms amplifying volatility in the Korean stock market will weaken.

AI profit upgrades are still ongoing, but so are the risks associated with AI.

Another reason JPMorgan remains optimistic is that South Korea's earnings expectations are still being raised.

Research reports show that South Korea's EPS estimates for 2026 have been raised by 143.4% over the past six months, with the technology sector seeing a 215.5% increase and the industrial sector a 91.0% increase. Despite significant stock price corrections, analysts' revisions to future earnings remain strong, particularly focused on AI-related technology and industrial sectors.

For the Korean market, the 6-month EPS revision is up 143.4%, with the technology sector up 215.5% and the industrial sector up 91.0%.

Factors supporting these upward revisions include massive investments in computing power, data center construction, spending on security and resilience, and medium- to long-term expectations of corporate governance reforms in South Korea. For the South Korean market, memory, servers, industrial equipment, and related supply chains remain the most directly beneficial sectors.

Risk also stems from the same direction. The fundamental foundation of this rally in the Korean stock market heavily relies on the AI cycle. If AI capital expenditures slow down, or if new technologies reduce demand for high-end memory and related hardware, upward earnings revisions may be reassessed. The relative weakness in sectors such as materials and consumer goods also indicates that the Korean market is not experiencing uniform improvement across all industries.

JPMorgan's target of 12,500 is predicated on the continued unwinding of leverage, the absence of any disproof of AI demand, and a easing of concentrated selling pressure from foreign investors. What can be said now is that the most crowded positions in the Korean market have clearly begun to unwind. What cannot yet be said is that volatility has returned to normal, foreign investors have shifted to sustained inflows, or the profit upgrades along the AI chain have been fully locked in.