De-leveraging in the Korean equity market is nearing its end, and the positioning backdrop is becoming more attractive
AI summary card
De-leveraging in the Korean equity market is nearing its end, and the positioning backdrop is becoming more attractive
JPMorgan believes that the roughly 40% decline in the Korean market since the June peak was mainly amplified by leveraged ETF and hedge fund position unwinds, and that the core de-leveraging pressure has now eased substantially, improving allocation appeal thanks to low valuations and earnings momentum.
- The KOSPI has fallen nearly 40% since its June 22 peak, but the report believes that the forced de-leveraging component of the price shock has already clearly faded.
- Assets under management in Korea-related leveraged ETFs have dropped from about US$50 billion to about US$17 billion, and JPMorgan judges that this part of the unwind has been completed and is no longer a major issue.
- In JPM Prime book, the hedge fund L/S ratio fell from 5.7x to 3.2x as of July 27, and together with the pullback in the price momentum factor on July 28-29, the de-leveraging process is estimated to be about 90% complete.
- The report still warns of possible short-term risks from FOMC rate hikes, elevated expectations for hyperscaler earnings, and residual spillover from de-leveraging, but overall positioning has become more attractive.
Report interpretation
Overview
This report is JPMorgan’s strategy update on the de-leveraging process in the Korean equity market. It notes that the Korean market has undergone severe de-leveraging since mid-June, with the KOSPI retreating about 40% from its June 22 peak. The initial decline, triggered by fundamental concerns and rotation flows, was further amplified by forced rebalancing from leveraged ETFs and position unwinds by hedge funds. JPMorgan’s latest view is that leveraged ETF clearing has been completed, hedge fund de-leveraging is about 90% complete, and market positioning pressure has returned to an acceptable level.
Core views
The core view is that although there may still be residual de-leveraging spillover over the next few days and investors are likely to remain cautious ahead of the FOMC and hyperscaler earnings, the combination of positioning, low valuations, and earnings momentum in the Korean market has already created a more attractive risk-reward setup. The report continues to favor diversified trades, including wealth-effect-related sectors, biopharma, deeply discounted preference shares, and banks supported jointly by improving asset quality, net interest margins, and trading volumes.
Analysis framework
The report mainly assesses whether de-leveraging is close to completion through market price drawdowns, leveraged ETF AUM, ETF flows, VKOSPI/VIX, single-stock futures open interest, JPM Prime book hedge fund L/S ratios, price momentum factor performance, margin balances, foreign investor flows, MSCI EM weight changes, and valuation metrics, and uses this to evaluate allocation opportunities in the Korean market.
Methodology notes
Assess the degree of position clearing through leveraged ETF AUM, hedge fund L/S ratios, margin balances, and foreign investor flows.
This framework is used to distinguish between declines driven by fundamentals and price shocks caused by forced position unwinds, and to judge whether subsequent selling pressure has clearly weakened.
Use KOSPI forward P/E and free cash flow valuation to gauge whether the market is at crisis-level undervaluation.
The report notes that KOSPI forward P/E is about 5x and estimated FCF is about 5x, both viewed as relatively undervalued levels.
Track whether foreign selling is concentrated in large-cap memory stocks and how selling pressure changes after their MSCI EM weights decline.
The report believes much of the foreign outflow came from long-only investors constrained by position limits in large-cap stocks, and that selling pressure has clearly slowed as the two heavyweight stocks’ weights in MSCI EM have fallen.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- KOSPICore market index and main allocation target
- Strengths
- Cheap valuation, oversold RSI, de-leveraging pressure nearing its end, and earnings momentum remains intact.
- Weaknesses
- The market was previously highly concentrated, and declines in heavyweight memory stocks dragged on the index significantly.
- Comparison
- Compared with the June peak, prices have corrected sharply and positioning crowding has fallen markedly.
- Risks
- FOMC rate hike risk, overly high expectations for hyperscaler earnings, and residual de-leveraging spillover.
- Korea-related leveraged ETFsA key channel that previously amplified market declines and volatility
- Strengths
- AUM has fallen sharply from the peak, and inflows have also stalled.
- Weaknesses
- They can trigger forced de-leveraging on down days, easily causing chain selling pressure.
- Comparison
- Compared with the roughly US$50 billion scale at the end of June, the current roughly US$17 billion has clearly normalized.
- Risks
- If the market falls sharply again, they may still amplify volatility, but the report believes the main risk has eased.
- Korean banksOne of the diversified trades the report continues to favor
- Strengths
- Revenue growth is improving asset quality, the BOK hiking cycle benefits NIM, and higher market turnover contributes to broker revenue.
- Weaknesses
- Still affected by the macro cycle, the rate path, and credit risk.
- Comparison
- Compared with crowded memory trades, banks have clearer multiple tailwinds.
- Risks
- If economic growth or asset quality deteriorates, the investment case for banks may weaken.
- BiopharmaA potential beneficiary among lagging sectors
- Strengths
- It has significantly lagged previously and may benefit from improving global healthcare sentiment.
- Weaknesses
- Sector elasticity depends on risk appetite and sentiment toward the global healthcare sector.
- Comparison
- Compared with popular market sectors, it is more of a catch-up and diversified allocation play.
- Risks
- If global healthcare sentiment does not improve, the catch-up rally may be delayed.
Key data
- KOSPI drawdownabout -40%Decline since the peak on June 22, 2026.
- Korea-related leveraged ETF AUMdown from about US$50 billion to about US$17 billionThe report believes the scale has fallen to a level that no longer poses a major issue.
- Hedge fund L/S ratiodown from 5.7x to 3.2xJPM Prime book data, as of July 27, 2026.
- Hedge fund de-leveraging completionabout 90%The report estimates it is close to an acceptable level.
- Korea margin balanceabout US$20 billionThe report believes retail margin leverage is not particularly high and still has cushion and discretion.
- Foreign investor year-to-date selling of Korean equitiesmore than US$110 billionThe report says most of this is related to long-only investors’ constraints on large-cap holdings.
- MSCI EM weights of the two major memory stocksabout 6.5% and 4.5%Below the roughly 9.5% and 8.3% levels in late June, and selling pressure has therefore slowed.
- KOSPI valuationforward P/E about 5x; estimated FCF about 5xThe report says it remains cheap even after adjusting for cyclicality, close to crisis-level valuation.
Impact & implications
The investment implication is that short-term volatility may still persist in the Korean market, but position clearing has shifted from being a major risk to a potential support factor. If selling pressure from leveraged ETFs and hedge funds continues to ease, low valuations, resilient memory prices, earnings momentum, and sector rotation may together help stabilize the market. Strategically, the report is more inclined to broaden from crowded concentrated memory trades into diversified directions such as wealth effect, banks, biopharma, preference shares, value, and defensive sectors.
Risks
- There is a high risk of an FOMC rate hike this week, which may weigh on risk appetite.
- Expectations for hyperscaler earnings are high; any disappointment could affect AI- and memory-related trades.
- This week’s price shock may still have residual spillover, leading to continued de-leveraging in the coming days.
- The Korean market was previously highly concentrated, and performance of heavyweight memory stocks may still dominate index direction.
- Although foreign outflows have slowed, any new round of large-cap selling would still affect market recovery.
What to watch
- Whether leveraged ETF AUM and inflows continue to stabilize at lower levels.
- Whether the hedge fund L/S ratio shown by JPM Prime book or other indicators further returns to a normal range.
- Whether the VKOSPI/VIX ratio and single-stock futures open interest continue to decline.
- Whether the KOSPI stabilizes after becoming oversold, and whether market breadth continues to improve.
- Whether spot and contract prices for memory remain resilient, especially whether 2026 average price levels can be sustained.
- Changes in the MSCI EM weights of the two major memory stocks and the pace of foreign outflows.
- The impact of the FOMC decision and hyperscaler earnings on Korea’s technology and memory chain.