The next re-rating of Korean equities: shifting from capital deleveraging to fundamentals-driven repricing

Overview

This report discusses the path toward the next re-rating of Korean equities after the sharp correction from late June to July 2026. Nomura believes this pullback was mainly a matter of capital flows and leverage structure: foreign investors passively cut positions due to portfolio constraints and higher index weights, support from domestic institutions such as pensions weakened, and retail-driven leveraged ETFs and single-stock leveraged ETFs amplified downside volatility. The core judgment of the report is that as the market deleverages, foreign selling pressure eases, and volatility declines, the Korean market will shift from a liquidity- and leverage-driven rally to a fundamentals-driven repricing led by earnings, ROE, shareholder returns, and policy reform.

Core views

Nomura maintains its 2026 KOSPI target of 10,000-11,000 and believes that AI-related earnings, the semiconductor memory/HBM supercycle, power equipment, ESS, nuclear power, and similar themes can support higher ROE over the next five years. At the corporate level, a shift by listed companies toward capital efficiency, shareholder returns, and optimal leverage will drive re-ratings in P/E and P/BV; at the policy level, active stewardship, aggressive shareholder activism, target ROE disclosure, a low-PBR list, treasury stock cancellations, and KOSDAQ reform may strengthen market quality. The report is also positive on the defense sector, supported by geopolitical risk and Middle East weapons import demand, as well as the auto sector's transformation toward physical AI and autonomous driving platforms.

Analysis framework

The report analyzes the KOSPI across multiple dimensions including capital flows, leveraged products, valuation, earnings forecasts, policy catalysts, and risk scenarios. The capital flow section tracks year-to-date net foreign selling, foreign ownership ratios, domestic equity allocations by pensions, leveraged ETF AUM, and forced liquidations; the valuation section derives the KOSPI target using 2026F P/E, P/BV, and ROE; the earnings section compares Nomura's 2026-2027F net profit forecasts with consensus; and the policy section assesses the impact of 2H26F market regulation, a low-PBR list, and tax reform on shareholder returns and capital formation.

Methodology notes

• Valuation methodsindex multiple valuation

  KOSPI target valuation

  Nomura supports its KOSPI target range of 10,000-11,000 with 2026F P/E of 10.5-11.5x, P/BV of 2.5-2.8x, and ROE of 27%.

• flow_analysisinvestor flow and deleveraging analysis

  Capital flow and deleveraging framework

  The report attributes this correction to mechanical foreign selling, pension allocation constraints, leveraged ETFs, and forced liquidation of retail financing, and watches slowing foreign selling, a decline in the K-VIX, ETF flows, and margin financing to judge whether deleveraging has been completed.

• policy_analysisKorea corporate governance and tax reform catalysts

  Policy-catalyzed re-rating

  The report argues that a low-PBR company list, dividend incentives, treasury stock cancellations, duplicate listing rules, and KOSDAQ reform could improve shareholder protection, reduce parent-company discounts, and enhance market quality.

• earnings_analysissector earnings preview

  Sector earnings recalibration

  The report compares Nomura's 2026-2027F net profit forecasts with consensus, noting that technology is slightly above or in line with expectations, autos/battery supply chain/internet/utilities are below expectations, and shipbuilding could beat expectations by about 10% due to currency tailwinds.

Asset mapping & comparison

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

• KOSPI

  Core index and strategy target

  Strengths

  Supported for re-rating by earnings and ROE upgrades, policy reform, share buybacks, and treasury stock cancellations.

  Weaknesses

  Sensitive to foreign flows, retail leverage, and volatility.

  Comparison

  The target of 10,000-11,000 is clearly above 6,691 on July 24; current 2026F P/E and P/BV are below target valuation.

  Risks

  Insufficient buybacks, mechanical foreign selling in the 7,500-9,000 range, and rebuilding of retail leverage.

• Large Korean semiconductor companies

  Main contributors to KOSPI earnings, ROE, and buybacks

  Strengths

  Memory/HBM supercycle, AI demand, and long-term agreements improving business stability, with an estimated contribution of about 90% of buyback value.

  Weaknesses

  The market is concerned about slowing AI capex, peaking or normalization in commodity memory prices.

  Comparison

  2026F semiconductor net profit is KRW595,141bn, 10% above consensus; 2027F is 12% above consensus.

  Risks

  US semiconductor tariffs, data center construction delays due to power shortages, and slowing AI capex in a high interest rate environment.

• Korean leveraged ETFs and single-stock leveraged ETFs

  Volatility amplifiers and indicators to monitor deleveraging

  Strengths

  Provide rapid capital inflows and high-beta exposure during upswings.

  Weaknesses

  Daily rebalancing erodes returns in choppy markets, and momentum-chasing capital leaves peak AUM exposed to declines.

  Comparison

  Since June 22, onshore leveraged ETFs have fallen 53%, while the KOSPI has fallen 22%.

  Risks

  If ETF inflows increase again, it would indicate risk appetite has not cooled and deleveraging may be incomplete.

• KRW

  Macro variable interacting with foreign flows

  Strengths

  A 1H26 trade surplus of USD138bn supports the basis for KRW appreciation in 2H26F.

  Weaknesses

  If market re-rating triggers mechanical foreign selling, it may partly offset appreciation pressure.

  Comparison

  The 1H26 trade surplus is significantly higher than USD27bn in 1H25.

  Risks

  If equity valuation expands while foreign rebalancing selling intensifies, KRW performance may weaken.

• Korean autos and defense sectors

  Positive industry directions highlighted in the report

  Strengths

  Defense is supported by geopolitical risk and Middle East weapons import demand; autos are transforming toward physical AI and autonomous driving platforms.

  Weaknesses

  2Q26 earnings previews for autos/battery supply chain are below expectations.

  Comparison

  Kia Corp, Hyundai Rotem, and others appear in stock picks and disclosure lists.

  Risks

  KRW appreciation, order delays, and demand or cost pressure may affect target price realization.

Key data

• KOSPI correction magnitude9,115 on 22-Jun-2026 to 6,691 on 24-Jul-2026The report believes the correction was mainly driven by capital flows, leveraged ETFs, and mechanical foreign selling.
• Year-to-date net foreign sellingKRW158tn / USD108bnForeign investors reduced positions as Korea's weight in benchmarks and portfolios increased.
• KOSPI target10,000-11,000Based on 2026F P/E of 10.5-11.5x, P/BV of 2.5-2.8x, and ROE of 27%.
• Current valuation2026/27F P/E 7.0x/5.2x; P/BV 1.7x/1.3xNomura believes there is still room for re-rating versus target valuation.
• Share buyback forecastKRW116tn / 274tn / 328tn for 2026F/27F/28FAbout 90% is expected to come from two large semiconductor companies.
• Number and scale of leveraged ETFs61 leveraged ETFs; KRW27tn AUM as of 23-JulOf this, single-stock leveraged ETF AUM is about KRW11tn, roughly 40% of total leveraged ETF AUM.
• Leveraged ETF decline-53% since 22-Jun vs KOSPI -22%Onshore listed leveraged ETFs fell more than twice as much as the KOSPI, reflecting volatility decay and momentum-chasing capital exposure.
• K-VIXaround 90; all-time high 96.9 on 29-Jun-2026The report believes the KOSPI rebound requires the K-VIX to stabilize and decline.
• Korea trade surplusUSD138bn in 1H26 vs USD27bn in 1H25The report believes this provides the basis for further KRW appreciation in 2H26F.
• 2026F total net profitKRW852,896bn; +253% y-y; 7% above consensusThe table shows significant contribution from semiconductors, with 2027F total net profit at KRW1,155,547bn.

Impact & implications

If the report's view plays out, the investment logic for the Korean market will shift from short-term leverage-driven flows to earnings upgrades, improved capital efficiency, and enhanced shareholder returns. Buybacks and treasury stock cancellations by large semiconductor companies could become a structural source of demand for the KOSPI; a low-PBR list and tax reform could drive changes in company-level capital allocation; and companies related to AI, memory/HBM, power equipment, ESS, nuclear power, defense, and autonomous driving are more likely to benefit. However, if the KOSPI approaches 7,500-9,000 again, mechanical foreign selling may reappear, and the market will need further earnings and ROE upgrades to absorb that selling pressure.

Risks

• Corporate share buybacks may fall short of Nomura's 2026F forecast of KRW116tn, especially if the two large semiconductor companies do not buy back shares in line with the assumption of about 50% of free cash flow, which could leave the KOSPI below its target path.
• If the KOSPI rises to 7,500-9,000 without further upgrades in earnings or ROE, mechanical foreign selling could intensify again.
• If retail investors rebuild high leverage before fundamentals improve, it could trigger another round of forced liquidation and amplified volatility.
• A global slowdown in AI capex, intensified competition in the AI semiconductor chain, or peaking/normalization in commodity memory prices could weaken the earnings upgrade thesis.
• KRW appreciation could pose downside risk to some export companies and individual stock target prices.
• If policy implementation is weaker than expected, including the low-PBR list, leveraged ETF regulation, tax reform, and corporate governance reform, market re-rating catalysts may weaken.

What to watch

• Whether the KOSPI again triggers mechanical foreign selling in the 7,500-9,000 range.
• Whether the K-VIX stabilizes and declines from around 90, an important prerequisite for fundamentals-driven trading to dominate.
• Whether the two large semiconductor companies' 2026F buybacks, employee reward buybacks, and shareholder return plans meet expectations.
• AUM, flows, and the strength of new regulatory enforcement for Korean leveraged ETFs and single-stock leveraged ETFs.
• The release of the low-PBR company list around November and its impact on treasury stock cancellations, higher dividends, and disposal of non-core assets.
• The specific strength of long-term equity investment incentives, inheritance and gift tax reform, and AI and semiconductor tax credits in the tax reform proposal at the end of July 2026.
• Whether 2Q26 and subsequent quarterly earnings validate the upgrade trend in semiconductors, nuclear power, power equipment, defense, and shipbuilding.
• The directional choice of the KRW between large trade surpluses and foreign equity flows.