Morgan Stanley just told investors to load up on South Korean equities, upgrading the market to overweight after a brutal stretch of selling that the firm believes has cleared the decks for a rebound. The thesis: a leverage washout in the market has improved the risk-reward profile for AI-linked and industrial stocks.
The KOSPI has been on a wild ride in 2026, with a 12.6% intraday plunge in late July driven by collapsing demand for AI chips. That session closed down roughly 6%.
The Morgan Stanley playbook
In a research note dated July 22, 2026, the firm laid out a selective but bullish case for South Korean equities. Morgan Stanley maintained a KOSPI target of 9,000, signaling significant upside from current levels.
The sector preferences tell a story about where the firm sees value after the washout. Banks are the top pick, followed by IT, industrials, and healthcare. The firm also upgraded telecom services to overweight.
Morgan Stanley is advocating a barbell approach: owning leading technology stocks on one end and defensive holdings on the other.
Within the industrials bucket, the firm singled out defense, shipbuilding, and nuclear energy as particularly favorable.
What happened to the KOSPI
Earlier in 2026, Morgan Stanley had raised its end-2026 KOSPI target to 5,200 from an initial 4,500, driven by stronger-than-expected earnings and favorable market reforms in South Korea.
Then the AI trade started unraveling. South Korea’s market is heavily weighted toward semiconductor giants, and when global demand for AI chips showed signs of cooling, the KOSPI took a direct hit. A 12.6% intraday drop triggers margin calls and forces leveraged investors to liquidate positions regardless of fundamentals.
Morgan Stanley sees that forced selling as a silver lining: when leveraged positions get wiped out, it removes a source of fragility from the market.
Why crypto investors should pay attention
South Korean market dynamics have an outsized influence on global crypto markets. South Korea consistently ranks among the top three countries for crypto trading volume, and the health of its domestic financial markets directly affects retail investor appetite for digital assets.
The AI angle is equally relevant. South Korea’s semiconductor industry is the hardware backbone of the AI infrastructure buildout. If Morgan Stanley is right that the leverage washout has created a floor for AI-related stocks, that’s a signal about the durability of the broader AI investment cycle, which has implications for GPU token projects and decentralized compute networks.
The KOSPI target of 9,000 implies Morgan Stanley sees a substantial rally ahead. But the 12.6% intraday drop is a fresh reminder that these recoveries rarely travel in straight lines.