Korea’s market deleveraging is nearing completion, with positioning becoming more attractive

Overview

This report updates the deleveraging process in the Korean equity market. J.P. Morgan points out that the Korean market has experienced a sharp decline and high volatility since mid-June, with the KOSPI down approximately 40% from its June 22 peak. Initial fundamental concerns and rotational outflows were amplified by leveraged ETFs, while recent trading has also shown signs of hedge fund position unwinding. The report believes that leveraged ETF unwinding is complete, hedge fund deleveraging is approximately 90% complete, and positioning in the Korean market has improved significantly, aligning with cheap valuations and supportive earnings momentum.

Core views

The core view is that most of the forced selling pressure in the Korean market has already been released. Although residual deleveraging spillover may persist over the coming days, and investors may remain cautious ahead of FOMC rate-hike risk and highly anticipated earnings reports from major cloud companies, the current risk-reward profile is more attractive. The report highlights that leveraged ETF assets fell from approximately US$50 billion in late June to approximately US$17 billion, while the long-short ratio in the JPM Prime book declined from 5.7x to 3.2x as of July 27. Retail financing risk is not pronounced, and foreign selling pressure is also easing as the weights of leading memory stocks decline.

Analysis framework

The report assesses whether deleveraging is nearing completion through four channels: first, the asset size, fund flows, and related volatility changes of Korea-linked leveraged ETFs; second, hedge fund long-short leverage in the JPM Prime book and the performance of price-momentum factors; third, Korean retail investor margin balances and margin-call pressure; and fourth, foreign flows, changes in MSCI EM weights, and the impact of leading memory stocks on the index and fund flows. It then combines valuation, earnings momentum, market breadth, and sector rotation to propose subsequent allocation directions.

Methodology notes

• positioning_analysisdeleveraging progress assessment

  Deleveraging progress assessment

  Forced selling pressure is assessed through leveraged ETF assets, hedge fund long-short ratios, margin balances, and foreign fund flows.

• valuation_analysisforward P/E and estimated FCF multiple

  Valuation stress testing

  The report uses the KOSPI’s approximately 5x forward P/E and approximately 5x estimated free cash flow multiple to show that the Korean market is in a very cheap valuation range.

• sector_rotationdiversification trade

  Diversification trade

  After concentration in memory stocks declines, the report seeks catch-up opportunities in lagging sectors and in value, defensive, and financial exposures.

Asset mapping & comparison

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

• KOSPI

  Core market index and vehicle for risk appetite

  Strengths

  Cheap valuation, RSI in oversold territory, deleveraging pressure nearing completion, and still-supportive earnings momentum.

  Weaknesses

  Market concentration was previously too high, making it sensitive to leading memory stocks and foreign flows.

  Comparison

  The report says the KOSPI’s forward P/E and free cash flow multiple are both approximately 5x, near crisis-level valuations.

  Risks

  Residual deleveraging, FOMC rate hikes, disappointing high-expectation earnings, and a reversal in the memory-price cycle.

• Korean leveraged ETFs

  A key channel that previously amplified market volatility and forced selling pressure

  Strengths

  AUM has declined from approximately US$50 billion to approximately US$17 billion, while inflows have stalled in recent days, reducing systemic pressure.

  Weaknesses

  They have a mechanical deleveraging mechanism on down days and previously amplified unwinding by other investors.

  Comparison

  At the peak, their relative market size was approximately four times that of the U.S.; it has now normalized.

  Risks

  If the market continues to fall rapidly, they may still cause localized volatility through execution channels such as single-stock futures.

• Korean hedge fund positioning

  An important source of recent market position unwinding

  Strengths

  The long-short ratio in the JPM Prime book has fallen from 5.7x to 3.2x, and the report estimates that deleveraging is approximately 90% complete.

  Weaknesses

  The price-momentum factor experienced substantial unwinding on July 28–29, indicating that position adjustments may still be intense.

  Comparison

  Current leverage is near the upper end of the 2025 range, materially below previous extreme levels.

  Risks

  If momentum, memory stocks, or the broader market remain under pressure, residual positions may still spill over.

• Korean banks

  One of the report’s preferred diversification trade directions

  Strengths

  Supported by improving asset quality from income growth, net interest margins supported by the Bank of Korea’s rate-hike cycle, and brokerage-income contributions from higher market trading volumes.

  Weaknesses

  Still affected by the macroeconomic rate path, the credit cycle, and capital-market volatility.

  Comparison

  Compared with the highly crowded memory theme, banks offer more diversified sources of value and returns.

  Risks

  If economic growth weakens or credit quality deteriorates, bank fundamentals may come under pressure.

• Biopharmaceuticals

  A preferred laggard catch-up direction

  Strengths

  A clearly lagging sector that may benefit from improving global healthcare sentiment.

  Weaknesses

  The report provides no specific company earnings or valuation details.

  Comparison

  Compared with the previously strong memory and AI chains, biopharmaceuticals represent a more contrarian and catch-up-oriented allocation.

  Risks

  Global healthcare sentiment may improve less than expected, or individual-stock catalysts may be insufficient.

• Korean preferred shares

  A preferred income and discount-repair trade

  Strengths

  Preferred-share discounts are near historical highs, while higher yields provide carry returns.

  Weaknesses

  Liquidity and corporate-governance discounts may persist.

  Comparison

  Compared with common shares, the core attractions of preferred shares are their discounts and yields.

  Risks

  If risk appetite continues to decline, discounts may remain elevated or widen further.

• Wealth-effect beneficiary sectors

  A preferred direction tied to Korean domestic demand and asset-price transmission

  Strengths

  Department stores, cosmetics, travel, brokers, and construction are considered supported by favorable wealth effects.

  Weaknesses

  Sensitive to household income, asset prices, and consumer confidence.

  Comparison

  These sectors provide diversified exposure distinct from memory stocks.

  Risks

  If further equity-market declines continue to weaken the wealth effect, demand in these sectors may fall short of expectations.

• Memory semiconductor stocks

  A key source of prior market concentration, foreign flows, and KOSPI volatility

  Strengths

  Spot memory prices remain on an upward trend, and third-quarter contract prices have also risen, although the sequential pace has slowed.

  Weaknesses

  Market concentration in leading memory stocks had previously become excessive, creating index pressure and foreign outflows during the correction.

  Comparison

  The report estimates that current market pricing implies memory prices returning to pre-AI levels in early 2027; every additional year of sustained high prices would add approximately US$150 billion in value.

  Risks

  Memory-price durability falling short of expectations, downward revisions to AI demand expectations, and disappointing earnings from major overseas cloud companies.

Key data

• KOSPI declineApproximately -40%Decline from the June 22, 2026 peak.
• Peak AUM of Korea-related leveraged ETFsApproximately US$50 billionThe late-June scale was high relative to the size of the Korean market, at approximately four times the corresponding U.S. level.
• Current AUM of Korea-related leveraged ETFsApproximately US$17 billionThe report believes this has fallen to a level that no longer constitutes a significant problem.
• Peak hedge fund long-short ratio5.7xFrom the JPM Prime book.
• Hedge fund long-short ratio3.2xAs of July 27, 2026, and potentially lower after price-momentum factor unwinding on July 28–29.
• Hedge fund deleveraging completionApproximately 90%The report judges that this is close to an acceptable level.
• Retail margin balanceApproximately US$20 billionThe report believes this is not particularly high and that margin financing has buffers and discretion, unlike the mechanical deleveraging of leveraged ETFs.
• Foreign sales of Korean equities year to dateMore than US$110 billionMost selling pressure is related to long-only funds’ constraints on large-cap weights.
• Share of foreign outflows contributed by two leading memory stocksApproximately 90%Foreign outflows have slowed significantly as their MSCI EM weights decline.
• MSCI EM weights of two leading memory stocks6.5% and 4.5%Down from 9.5% and 8.3% in late June.
• KOSPI forward P/EApproximately 5xThe report says it remains cheap even after considering cyclicality.
• Estimated free cash flow multipleApproximately 5xThe report describes this as a crisis-level valuation.

Impact & implications

If the report’s assessment is correct, the primary pressure on Korean equities will shift from forced deleveraging toward validation of fundamentals, interest rates, and earnings expectations. In the short term, residual position unwinding, FOMC rate-hike risk, and the impact of major cloud-company earnings on expectations for AI and the memory supply chain remain risks. Over the medium term, low valuations, earnings momentum, volatility normalization, and easing fund-flow pressure could provide a foundation for a rebound in the Korean market and broader sector participation.

Risks

• Residual deleveraging spillover may still occur over the coming days.
• The FOMC meeting carries significant rate-hike risk, which could weigh on risk assets.
• Expectations for major cloud-company earnings are high; disappointment could hurt sentiment toward the AI and memory chains.
• If memory prices decline earlier than expected, support for Korean earnings and valuations will weaken.
• Although foreign outflows are easing, selling pressure could recur if MSCI EM weights or large-cap performance deteriorate further.
• This is a strategy report and does not provide a single-company financial model, rating, or target price; individual stocks require separate validation.

What to watch

• Whether AUM and inflows of Korea-related leveraged ETFs remain stable at low levels.
• Whether hedge fund long-short leverage in the JPM Prime book or other observable channels normalizes further.
• Whether the VKOSPI-to-VIX ratio continues to decline, confirming volatility normalization in Korea.
• Whether Korean retail margin balances and margin-call pressure remain manageable.
• Changes in the MSCI EM weights of the two leading memory stocks and the pace of foreign outflows.
• The sustainability of spot and contract memory prices, particularly whether they return to pre-AI levels around 2027.
• The impact of the FOMC rate decision and major cloud-company earnings on the global AI chain and Korean memory stocks.
• Whether diversified trades in value, defensive sectors, banks, biopharmaceuticals, consumer stocks, and preferred shares continue to outperform.