After the sharp KOSPI decline, valuations have fallen to extremely low levels, and the risk-reward is viewed as somewhat positive

Overview

This is a weekly Korea equity report focused on KOSPI's sharp decline amid global momentum trade unwinds and a semiconductor sector sell-off, as well as valuation re-rating, earnings revisions, fund flows, leveraged ETFs, and margin financing pressure. The report argues that although short-term risk appetite has deteriorated and market volatility has increased, KOSPI valuations have been compressed to historically extreme lows and still show attractive risk-reward under stress scenarios.

Core views

The report's core views are: first, KOSPI's decline has been too severe relative to the earnings outlook, as forward earnings have historically been closely correlated with the index, but the current pullback has significantly exceeded what can be explained by earnings downgrades alone; second, even assuming earnings downgrades reach the worst levels seen during the global financial crisis and applying P/E multiples near the 2008 earnings trough, KOSPI still shows somewhat positive risk-reward; third, valuation metrics are near or below levels seen during historical stress periods, with forward P/E at the lowest since 2004 and forward P/B down to 1.4x; fourth, margin financing and leveraged ETF pressures need to be monitored, but retail ETF flows and deposit balances still show some resilience.

Analysis framework

The report uses a weekly market strategy framework, combining analysis of index performance, sector relative returns, earnings revisions, valuation multiples, investor flows, margin balances, currency performance, interest rates, and risk appetite indicators, and assesses KOSPI's downside risk and rebound potential through comparisons with historical stress periods.

Methodology notes

• valuation analysisHistorical percentile comparison of forward P/E and forward P/B

  Compare KOSPI's current 12-month forward P/E and P/B with 2004, 2008, and long-term historical ranges to judge whether valuations have already priced in excessive pessimism.

  The report notes that as of July 16, 2026, KOSPI's forward P/E fell to 5.8x, the lowest since 2004, and forward P/B fell to 1.4x, while ROE remained around 25%.

• earnings stress testSensitivity of earnings downgrades under a global financial crisis scenario

  Stress test current consensus earnings using the worst historical downgrade magnitude, then combine it with historical P/E multiples near the earnings trough to estimate the index's implied level.

  The report uses the roughly 41% worst-case earnings downgrade during the 2008 global financial crisis as the stress assumption and argues that even under this scenario KOSPI's risk-reward remains somewhat positive.

• flow and leverage monitoringTracking ETFs, margin balances, and margin call pressure

  Assess whether the sell-off is accompanied by systemic deleveraging through leveraged ETF size, margin balances, margin call receivables, broker receivables, and investor flows.

  The report notes that leveraged ETFs account for about 5% of Korea ETF total AUM, margin balances have fallen from a KRW 38 trillion peak to about KRW 33 trillion, and deposit balances have risen to about KRW 110 trillion.

• risk appetite indicatorKorea Equity Risk Barometer

  Use the GSSRKERB Index to gauge the state of risk appetite in the Korean equity market.

  The latest GSSRKERB is -2.7, indicating the market has moved further into a deeper risk-off zone.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• KOSPI

  Core asset covered in the report

  Strengths

  Valuations have compressed sharply, forward P/E has fallen to historically extreme low levels, forward ROE remains around 25%, and risk-reward is somewhat positive under stress tests.

  Weaknesses

  In the short term, it is weighed down by global momentum unwinds, the semiconductor sell-off, and deteriorating risk appetite, with the index down nearly 25% since June 22.

  Comparison

  Forward P/E is below the trough of the 2008 global financial crisis, and MXKR still trades at a clear valuation discount versus global and Asia-Pacific peers.

  Risks

  Further earnings downgrades, worsening semiconductor cycle conditions, accelerating deleveraging, and recurring foreign outflows.

• Korean technology and semiconductor-related sectors

  Main source of drag

  Strengths

  Historical earnings revision data for the technology sector still show relatively strong earnings momentum.

  Weaknesses

  They have been the weakest performers in the current global semiconductor sell-off and are an important source of KOSPI's sharp decline.

  Comparison

  Clearly under pressure relative to sectors such as chemicals, banks, and insurance, which outperformed this week.

  Risks

  Further global semiconductor demand or valuation repricing, continued momentum unwinds, and declining earnings expectations.

• Korean chemicals, banks, and insurance sectors

  Relatively defensive and outperforming sectors this week

  Strengths

  They performed relatively well during KOSPI's sharp down week, reflecting some defensive characteristics or sector rotation in flows.

  Weaknesses

  They are still affected by overall Korean market risk appetite and the index decline.

  Comparison

  More resilient than technology, construction, and retail.

  Risks

  If the market sell-off broadens, defensive outperformance may narrow.

• KRW

  Macro condition indicator for the Korean market

  Strengths

  It strengthened this week against USD, JPY, and EUR, easing some external pressure.

  Weaknesses

  Currency performance remains influenced by global risk appetite, rate differentials, and capital flows.

  Comparison

  The report also tracks USDKRW, USDCNY, and the US-Korea 10-year yield spread.

  Risks

  If risk appetite continues to deteriorate or the dollar strengthens, KRW may come under pressure again.

• Korean leveraged ETFs and margin trading

  Market volatility amplifier and indicator of retail risk appetite

  Strengths

  Leveraged ETFs still account for only about 5% of Korea ETF total AUM, retail investors continue to show inflows into both traditional and leveraged ETFs, and deposit balances are rising.

  Weaknesses

  Margin call receivables remain elevated, broker receivables have risen to KRW 1.5 trillion, and margin balances, though lower, still need monitoring.

  Comparison

  Leveraged ETF AUM has retreated to around levels seen before the launch of single-stock leveraged ETFs.

  Risks

  If the index continues to fall, margin pressure and deleveraging in margin financing could amplify market volatility.

Key data

• KOSPI weekly performance-8.8%The decline occurred amid ongoing momentum unwinds and a global semiconductor sell-off.
• KOSPI decline since June 22close to -25%The report attributes this to global momentum unwinds and the semiconductor sell-off.
• KOSPI 12-month forward P/E5.8xAs of July 16, 2026, the lowest since 2004 and below the trough of the 2008 global financial crisis.
• KOSPI 12-month forward P/B1.4xAlthough forward ROE remains around 25%, P/B has pulled back from the June 22 peak.
• KOSPI 12-month forward EPS weekly revision-0.4%Utilities saw the strongest upgrades, while steel saw the largest downgrades.
• KRW versus USD weekly performance+1.2%KRW strengthened against USD this week, while also rising 1.5% against JPY and 0.9% against EUR.
• Korea Equity Risk Barometer-2.7The indicator has moved further into a deeper risk-off zone.
• Margin balancesabout KRW 33 trillionDown from the KRW 38 trillion peak, but around 0.5% on a market-cap-adjusted basis.
• Broker receivablesKRW 1.5 trillionRecently increased, indicating financing-related pressure still warrants attention in a volatile environment.
• Deposit balancesabout KRW 110 trillionHigher deposit balances have reduced the ratio of margin balances to deposit balances.

Impact & implications

For investors, the report's implication is that the market remains in a risk-off and momentum-unwind phase in the short term, and technology and semiconductor-related sectors may continue to face pressure; however, overall KOSPI valuations are already in an extremely low range, and if earnings expectations do not undergo a deep downgrade on the scale of the global financial crisis, the index's medium-term risk-reward may improve. On the flow side, renewed foreign buying and resilient retail ETF inflows are stabilizing signals, but margin calls, broker receivables, and margin balances remain potential amplifiers of volatility.

Risks

• The global semiconductor sell-off continues, further pressuring Korea's technology-heavy sectors.
• Momentum unwinds have not ended, causing short-term overshooting or greater volatility in the index.
• KOSPI earnings expectations undergo deeper downgrades, weakening support from low valuations.
• Pressure from margin calls, broker receivables, and margin balances triggers further deleveraging.
• Foreign fund flows reverse again, and the recent turn to net buying fails to persist.
• Korea's equity risk barometer stands at -2.7, indicating risk appetite remains weak.

What to watch

• Whether KOSPI forward EPS continues to be downgraded, especially the direction of revisions in sectors such as technology, steel, and utilities.
• Whether KOSPI forward P/E and P/B recover from extremely low levels or continue to reflect a more pessimistic earnings scenario.
• Subsequent foreign investor flows into KOSPI autos, retail, and technology sectors.
• Changes in leveraged ETF AUM, margin balances, margin call receivables, and broker receivables.
• Whether retail inflows into traditional ETFs and leveraged ETFs remain resilient.
• The KRW/USD trend and the impact of the US-Korea rate spread on risk appetite for Korean assets.
• Whether the GSSRKERB Index rebounds from the deep risk-off zone of -2.7.