KOSPI Nears Bear-Case Level; Market Appears Oversold but Urgently Needs Liquidity Repair

Overview

This report focuses on the state of the Korean stock market following its sharp decline on July 28. Morgan Stanley notes that the KOSPI fell to 6,023.66, nearly touching its 6,000-point bear-case level. The market is clearly oversold from both technical and valuation perspectives, but the speed of any recovery depends on improved liquidity, regulatory changes, chip-stock earnings calls, and external macroeconomic and geopolitical factors.

Core views

The core view is that current market problems stem more from headline shocks and liquidity pressure than from a clear deterioration in fundamental floors. The KOSPI's forward P/E below 6x and the capitulation index near its non-crisis low indicate that selling pressure has reached an extreme zone. However, the Korean market previously relied on funding momentum from retail investors and single-stock leveraged ETFs. If regulation raises margin requirements, increases minimum investment units, or limits single-stock leveraged ETF position ratios, short-term liquidity could remain under pressure. The upcoming 2Q26 results from leading chipmakers and their capital-management actions will be important signals for assessing whether the market can recover.

Analysis framework

The report uses the magnitude of the market decline, key index levels, the retracement of year-to-date gains, the capitulation index, 12-month forward P/E, changes in single-stock leveraged ETF AUM, and the earnings schedules of leading chipmakers to assess whether the Korean stock market has entered an oversold range and the liquidity conditions required for a rebound.

Methodology notes

• market_sentimentCapitulation Index

  Capitulation indicator

  The report uses the capitulation index to measure market selling and sentiment pressure. The current reading is -2.36, very close to its low outside crisis periods, suggesting that selling pressure may be approaching an extreme.

• Valuation methods12-month forward P/E

  12-month forward P/E

  The report uses the KOSPI's forward P/E below 6x as evidence of an extreme valuation low and notes that this level is below the 6.3x level during the global financial crisis.

• liquiditySingle-stock leveraged ETF AUM

  Single-stock leveraged ETF assets under management

  The report focuses on the decline in single-stock leveraged ETF AUM from a peak of more than ₩17tn to approximately ₩9tn, as well as the impact of potentially tighter regulation on market liquidity and retail-fund behavior.

Asset mapping & comparison

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

• KOSPI

  Core Korean market index

  Strengths

  Valuation has fallen to below 6x forward P/E, while the capitulation index is near its low outside crisis periods, indicating that the market may be oversold.

  Weaknesses

  Retail investor confidence has been damaged following the one-day plunge, and the key 7,000-point support level has been breached. A rapid recovery requires liquidity to return.

  Comparison

  The current forward P/E is below the 6.3x level during the global financial crisis.

  Risks

  Federal Reserve policy, tensions in the Middle East, changes in the AI infrastructure narrative, and tighter leveraged ETF regulation could continue to weigh on the market.

• Samsung Electronics

  Core Korean market and semiconductor-sector heavyweight

  Strengths

  Its upcoming 2Q26 results could become a recovery catalyst if they contain positive capital-management signals.

  Weaknesses

  The stock fell 13.4% on July 28, significantly weighing on the index during the current selloff.

  Comparison

  Along with SK hynix and SEMCO, it is among the chip and related proxy names leading the current decline.

  Risks

  If the earnings call fails to ease concerns about capital management and the AI demand narrative, sector pressure could persist.

• SK hynix

  Korean semiconductor leader and AI infrastructure-related name

  Strengths

  Its 2Q26 earnings release is scheduled before Samsung Electronics', potentially providing the sector's first clues on demand and capital allocation.

  Weaknesses

  The stock fell 14.6% on July 28, a significant decline.

  Comparison

  Its decline was greater than that of Samsung Electronics but smaller than that of SEMCO.

  Risks

  Changes in the AI infrastructure narrative and disappointment regarding capital-management expectations could affect market sentiment.

• Single-stock leveraged ETFs

  Amplifier of Korean market retail liquidity and volatility

  Strengths

  Previous AUM exceeded ₩17tn at its peak, indicating that the product category had been an important source of incremental funds.

  Weaknesses

  AUM fell to approximately ₩9tn as of July 27, while the category faces regulatory discussions concerning margin requirements, minimum investment units, and limits on single-name holdings.

  Comparison

  Hong Kong regulators have also reportedly considered adjusting leveraged/inverse ETF rules to reduce volatility, indicating a trend toward tighter regional regulation.

  Risks

  Tighter regulation could accelerate deleveraging and weaken the liquidity required for a short-term rebound.

Key data

• KOSPI one-day decline-10.8%The KOSPI fell to 6,023.66 on July 28, 2026.
• Morgan Stanley bear-case level6,000The KOSPI nearly touched this bear-case index level.
• Retracement of year-to-date gainsMore than 60%The report states that more than 60% of the year-to-date gains have disappeared.
• Capitulation index-2.36Very close to its low outside crisis periods.
• KOSPI 12-month forward P/E<6xBelow the 6.3x level during the global financial crisis.
• Samsung Electronics decline-13.4%One of the individual stocks leading the decline on July 28.
• SK hynix decline-14.6%One of the individual stocks leading the decline on July 28.
• SEMCO decline-15.9%One of the individual stocks leading the decline on July 28.
• Single-stock leveraged ETF AUMApproximately ₩9tnAs of July 27, 2026, significantly below the peak of more than ₩17tn.
• Change in margin requirements₩10mn to ₩30mnMedia reports that a higher minimum margin requirement will take effect on July 31, 2026, with cash only accepted.

Impact & implications

For investors, the implication is that the short-term risk-reward profile of the Korean stock market has improved because valuations and sentiment have reached extreme levels, but this does not mean an immediate reversal. If tighter leveraged ETF regulation causes retail funds to deleverage further, the market may continue to lack liquidity. If earnings calls from leading chipmakers deliver positive capital-management signals and external macroeconomic and geopolitical pressures ease, the probability of a rapid KOSPI recovery from near its bear-case level will increase.

Risks

• Tighter leveraged ETF regulation could trigger further deleveraging and liquidity contraction.
• Changes in the Federal Reserve's policy path could affect global risk appetite and capital flows.
• Tensions in the Middle East could continue to suppress risk-asset valuations.
• A weakening AI infrastructure investment narrative could weigh on Korean semiconductor heavyweights.
• If leading chipmakers' earnings and capital-management commentary fall short of expectations, the market recovery could be impeded.

What to watch

• SK hynix's 2Q26 earnings release at 9:00 KST on July 29, 2026.
• Samsung Electronics' 2Q26 earnings release at 10:00 KST on July 30, 2026.
• Regulatory developments concerning minimum margins, minimum investment units, and single-stock leveraged ETF position limits in Korea.
• Whether single-stock leveraged ETF AUM continues to decline from approximately ₩9tn.
• Whether the KOSPI can rapidly recover from near the 6,000-point bear-case level into a key technical range.