KOSPI fell 2% this week, but foreign inflows and improving flows into the technology sector provide support

Overview

This report is Goldman Sachs' weekly update on the Korean equity market, with a core focus on KOSPI performance, foreign investor flows, retail margin financing and leveraged ETF deleveraging, sector performance, earnings revisions, valuation discount, currencies, rates, commodities, and Korean market technical indicators. The report title emphasizes that despite foreign inflows and Alphabet's increased AI capital expenditure boosting sentiment around technology-related names, KOSPI still fell about 2% this week.

Core views

The core view of the report is that the Korean market remains in a volatile and risk-off environment in the short term, but there has been localized improvement in flows. Foreign investors have posted two consecutive weeks of inflows into KOSPI, with the technology sector being the main beneficiary; however, long-term foreign positioning remains low, and foreign ownership in the semiconductor sector is about two standard deviations below historical levels. Retail margin balances and leveraged ETF assets have retreated from elevated levels, indicating that the market is deleveraging. On earnings, KOSPI 12-month forward EPS was revised down 0.4% this week, with clear sector divergence. On valuation, Korea/MXKR still trades at a significant discount relative to global and Asian regional indices.

Analysis framework

The report uses a weekly market monitoring framework that combines index performance, sector relative returns, foreign and local investor flows, hedge fund net trading, short interest balances, margin financing and securities lending, leveraged ETF AUM, earnings revisions, forward P/E and P/B valuations, currency/rates/commodities data, and the risk barometer to assess short-term risk appetite and allocation signals in the Korean equity market.

Methodology notes

• Market flow analysisForeign Flows and Positioning

  Foreign inflows, foreign ownership, and hedge fund trading are jointly used to judge overseas investors' risk appetite toward the Korean market.

  The report observes that KOSPI has received foreign inflows for two consecutive weeks, while also noting that the Korean market still faces a backdrop of significant foreign outflows and that foreign holdings in semiconductors remain light.

• Valuation analysisForward P/E and P/B Discount

  12-month forward P/E, P/B, and the discount relative to MSCI AC World and MXAPJ are used to measure the valuation position of the Korean market.

  The report shows the valuation discount of KOSPI and MXKR relative to global and Asian regional peers, and compares the current discount by sector with the 10-year historical range.

• Risk appetite monitoringKorea Equity Risk Barometer

  The Korea Equity Risk Barometer is used to assess whether the market is in a risk-on or risk-off zone.

  The latest GSSRKERB Index is -1.1, which the report interprets as still being in the risk-off zone.

• Leverage and retail behaviorRetail Margin Loans and Leveraged ETFs

  Margin balances, margin call ratios, brokerage receivables, and leveraged ETF AUM are used to measure retail leverage pressure.

  The report shows that margin balances have fallen from a peak of US$25bn to US$22bn, and Korean leveraged ETF AUM has dropped from US$53bn to US$26bn, indicating that recent volatility has driven deleveraging.

Asset mapping & comparison

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

• KOSPI Index

  Core covered asset

  Strengths

  Foreign investors have posted two consecutive weeks of inflows, and valuations trade at a deep discount relative to history and regional peers.

  Weaknesses

  It fell 2% this week, 12-month forward EPS was revised down 0.4%, and the risk barometer is in the risk-off zone.

  Comparison

  Relative to MSCI AC World and MXAPJ, MXKR still trades at a significant discount on an NTM P/E basis.

  Risks

  Whether foreign inflows can continue, whether earnings downgrades will widen, and whether market volatility and deleveraging pressure will persist.

• KOSPI Tech / Semiconductors

  Primary direction of fund inflows and assets tied to the AI capex theme

  Strengths

  Foreign buying of KOSPI has been mainly driven by inflows into the technology sector, and Alphabet's increase in AI capital expenditure may support related sentiment.

  Weaknesses

  Foreign ownership in the semiconductor sector remains about two standard deviations below historical levels, indicating that prior foreign outflow pressure is still significant.

  Comparison

  Relative to other KOSPI sectors, the technology sector is receiving more attention in terms of improving flows.

  Risks

  Changes in AI capital expenditure expectations, volatility in global technology stocks, and renewed foreign outflows.

• Korean leveraged ETFs

  Indicator of retail risk appetite and leverage exposure

  Strengths

  Systemic pressure has eased marginally after deleveraging, and leveraged ETF AUM has already retreated substantially from its peak.

  Weaknesses

  AUM has fallen from US$53bn to US$26bn, reflecting market weakness and reduced demand for leverage.

  Comparison

  Current leveraged exposure is equivalent to 2.1% of free-float market capitalization, and remains an important variable for monitoring retail risk appetite.

  Risks

  If the market continues to weaken, leveraged products may remain under pressure and amplify volatility.

• KRW

  Macro and flow backdrop variable for the Korean equity market

  Strengths

  KRW appreciated against USD, JPY, and EUR this week, which helps improve foreign investor returns and market sentiment.

  Weaknesses

  The exchange rate remains affected by the U.S. dollar, rate differentials, and regional risk appetite.

  Comparison

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

  Risks

  A rebound in the U.S. dollar, widening rate differentials, or weaker regional risk appetite could undermine KRW performance.

Key data

• Weekly KOSPI performance-2%The report states that KOSPI fell about 2% this week.
• KOSPI 12-month forward EPS revision-0.4%Earnings forecasts were revised down slightly this week, with chemicals seeing the strongest upward revisions and autos the largest downward revisions.
• Weekly KRW vs USD change+1.6%The Korean won appreciated 1.6% against the U.S. dollar this week.
• Weekly KRW vs JPY change+2.5%The Korean won appreciated 2.5% against the Japanese yen this week.
• Weekly KRW vs EUR change+2.1%The Korean won appreciated 2.1% against the euro this week.
• Korea Equity Risk Barometer-1.1The GSSRKERB Index remains in the risk-off zone.
• Retail margin balanceUS$22bnIt declined from a peak of US$25bn to US$22bn.
• Market cap-adjusted margin balance level0.5%The report says the market cap-adjusted margin balance remains at 0.5%.
• Margin calls as a share of receivables0.7%As of July 23, despite market volatility, this ratio fell to 0.7%.
• Brokerage receivablesKRW0.9trnRecently declined to about KRW0.9trn.
• Korean leveraged ETF AUMUS$26bnFell from a peak of US$53bn to US$26bn.
• Leveraged ETF exposure as a share of free-float market cap2.1%The report says leveraged exposure is equivalent to 2.1% of the market's free-float market capitalization.
• Current KOSPI 12-month forward P/E6.1xThe table shows the current value for the KOSPI Index at 6.1x, below the historical average of 10.0x.
• MXKR NTM P/E discount vs MXWD-67%The table shows that MXKR's current NTM P/E discount relative to MSCI AC World is 67%.
• MXKR NTM P/E discount vs MXAPJ-53%The table shows that MXKR's current NTM P/E discount relative to MXAPJ is 53%.

Impact & implications

For investors, the report conveys a combined signal of 'market decline but marginal improvement in flows.' Short-term risk appetite remains weak, and deleveraging and earnings downgrades may weigh on index performance; however, foreign money returning to technology, underweight positioning in semiconductors, deep valuation discounts, and easing short activity may provide an observation window for a subsequent rebound or structural allocation opportunities. By sector, construction, software, and telecom are relatively strong, while autos, securities, and insurance face greater short-term pressure; earnings upgrades in chemicals are strong, while earnings downgrades in autos warrant caution.

Risks

• A continued decline in KOSPI could further deteriorate risk appetite.
• Recent foreign inflows may only be a short-term repair, while long-term foreign outflow pressure has not yet been fully reversed.
• Low foreign ownership in semiconductors may provide room for re-entry, but it also reflects continued caution from global investors toward Korea's core sector.
• KOSPI 12-month forward EPS has been revised down, and if earnings downgrades broaden, valuation attractiveness will weaken.
• Deleveraging in retail margin financing and leveraged ETFs may continue to suppress market liquidity and short-term trading sentiment.
• Movements in the Korean won, interest rate differentials, and commodity price volatility may affect foreign allocation and corporate earnings.

What to watch

• Whether foreign investors continue to flow into KOSPI, especially the technology and semiconductor sectors.
• Whether foreign ownership in KOSPI semiconductors recovers from low levels.
• The direction of KOSPI 12-month forward EPS revisions, with a focus on whether earnings upgrades in chemicals can continue and whether earnings downgrades in autos widen.
• Whether Korean leveraged ETF AUM, margin balances, margin call ratios, and brokerage receivables continue to decline.
• Whether the GSSRKERB Index rebounds from the -1.1 risk-off zone.
• The trend of KRW against USD and changes in the U.S.-Korea 10-year yield spread.
• Whether short balances and trading activity continue to decline.
• Whether KOSPI's valuation discount relative to MSCI AC World and MXAPJ narrows.