KOSPI rises 5%, but foreign selling and semiconductor concentration remain the key constraints
AI summary card
KOSPI rises 5%, but foreign selling and semiconductor concentration remain the key constraints
Goldman Sachs believes Nvidia's results boosted sentiment toward Korean equities, lifting the KOSPI by 5% this week, but continued foreign outflows, leveraged ETF exposure, and diversification requirements driven by semiconductor concentration still warrant attention.
- The KOSPI rose 5% this week, with technology, insurance, and shipbuilding outperforming, while machinery, software, and leisure lagged.
- KOSPI 12-month forward EPS was revised up 1.7%, with the strongest earnings revisions in leisure and the largest downward revisions in insurance.
- South Korea has about 17 domestic stock leveraged ETFs, just over 1% of roughly 1,100 listed ETFs, and leveraged ETF AUM accounts for about 4%.
- Year to date, Korean retail investors have poured about US$14bn into plain ETFs and about US$2bn into leveraged ETFs, so domestic leveraged ETF exposure is not extreme.
- Foreign investors have accumulated about US$62bn of net outflows from the KOSPI, of which about US$57bn came from selling pressure related to the two large semiconductor names; foreign ownership in semiconductors has fallen to a 10-year low.
- The two large semiconductor names have breached diversification constraints; cumulative related selling pressure since late October is estimated at about US$69bn, and each 1 percentage point increase in their combined weight could trigger about US$2bn of additional outflows.
Report interpretation
Overview
This report is Goldman Sachs' weekly strategy update on the Korean equity market, focusing on the KOSPI's gains this week, the sentiment boost from Nvidia's results, market exposure ahead of the launch of Korean single-stock leveraged ETFs, continued foreign selling, and diversification constraints created by semiconductor concentration. The report also tracks valuation, earnings revisions, fund flows, the KRW exchange rate, and Korean equity risk indicators.
Core views
The core view is that the Korean market is supported in the short term by technology sentiment and upward earnings revisions, but foreign capital flows remain negative. Leveraged ETFs still account for a small share of the overall Korean ETF market, and retail inflows into plain ETFs are clearly stronger than into leveraged ETFs, so domestic leveraged ETF risk may not be as extreme as it appears. By contrast, foreign selling pressure and semiconductor concentration matter more. Because the two large semiconductor names have driven the index higher and exceeded diversification thresholds, some Korean thematic funds may be forced to reduce holdings; however, foreign ownership in semiconductors is already low, suggesting that a substantial portion of the foreign selling may already be complete. If market leadership broadens to defense, shipbuilding, power infrastructure, and other sectors, it would help ease concentration pressure and could attract foreign inflows back to the market.
Analysis framework
The report uses a weekly market strategy framework, combining index performance, sector relative performance, earnings revisions, ETF flows, margin financing, foreign ownership, fund AUM, and regulatory diversification constraints. Its focus is not on a single company's fundamentals, but on how market structure, capital flows, and portfolio rebalancing pressure affect the KOSPI.
Methodology notes
Judge whether leverage risk in the Korean market is excessive by looking at leveraged ETF counts, AUM share, retail flows, and margin financing.
The report says the number and AUM share of domestic stock leveraged ETFs in Korea are low relative to the overall ETF market, plain ETF inflows are stronger, and although margin financing has risen to nearly KRW35tn, it has fallen as a share of total market capitalization, so domestic leveraged ETF exposure is not extreme.
Compare total foreign outflows from the KOSPI with outflows excluding the two large semiconductor names to determine the source of selling pressure.
The report shows about US$62bn of net foreign outflows from the KOSPI, of which about US$57bn is linked to the two large semiconductor names, while foreign ownership in semiconductors has fallen to a 10-year low, indicating that the selling pressure is highly concentrated and may already be partly exhausted.
When a few stocks become too large a weight, Korean thematic funds may have to sell those stocks because of diversification requirements.
The report estimates that cumulative selling pressure related to diversification requirements has been about US$69bn since late October; at the current AUM level, each 1 percentage point increase in the combined weight of the two large semiconductor names could trigger about US$2bn of additional outflows.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- KOSPICore coverage index
- Strengths
- Up 5% this week, 12-month forward EPS revised up, and the risk indicator returned to neutral.
- Weaknesses
- Foreign investors continue to sell, and the market rally depends on a few large semiconductor stocks.
- Comparison
- KOSPI flows excluding SEC and Hynix are clearly better than for the overall KOSPI, indicating that selling pressure is concentrated in a few large-cap semiconductor names.
- Risks
- If foreign outflows continue or semiconductor weights keep rising, the index may face rebalancing-related selling pressure.
- Korean semiconductor stocksThe main source of foreign selling and index concentration
- Strengths
- Still the leading sector behind the recent market rally, supported by global AI and Nvidia earnings sentiment.
- Weaknesses
- Foreign ownership is at a 10-year low, and the combined weight of the two large semiconductor names is above diversification thresholds.
- Comparison
- Compared with other sectors, semiconductors account for the vast majority of foreign outflows from the KOSPI.
- Risks
- Diversification requirements may trigger passive selling, and further weight increases would amplify outflow pressure.
- Korean leveraged ETFsA market-structure risk monitor
- Strengths
- Their count and AUM share of the overall ETF market remain low, and plain ETFs attract more capital.
- Weaknesses
- The upcoming launch of single-stock leveraged products may increase investor attention and volatility risk.
- Comparison
- Korean retail investors already have high exposure to overseas-listed leveraged ETFs, but domestic stock leveraged ETF exposure is relatively mild.
- Risks
- If leveraged products expand quickly, they could amplify retail trading volatility and technical market pressure.
- KRWA macro variable for the Korean equity market
- Strengths
- No clear support factors were identified; it mainly reflects risk appetite and capital flows.
- Weaknesses
- It weakened this week versus the USD, JPY, and EUR.
- Comparison
- It fell 1.3% versus the US dollar, weaker than its declines versus the JPY and EUR.
- Risks
- Further weakness in the exchange rate could reduce foreign willingness to allocate to Korean equities.
- Defense, shipbuilding, and power infrastructure sectorsPotential broadening leadership sectors
- Strengths
- If these sectors improve, they could ease semiconductor concentration pressure and help attract foreign capital.
- Weaknesses
- The report does not provide detailed earnings or valuation data for these sectors.
- Comparison
- Relative to semiconductors, these sectors are a useful area to watch for broadening market leadership.
- Risks
- If they fail to participate in the rally, the KOSPI may remain overly dependent on a few large semiconductor names.
Key data
- KOSPI weekly performance+5%Boosted by Nvidia's results, with technology, insurance, and shipbuilding outperforming.
- KOSPI 12-month forward EPS revision+1.7%Leisure saw the strongest upward revision, while insurance had the largest downward revision.
- Number of domestic stock leveraged ETFs in KoreaAbout 17Just over 1% of roughly 1,100 listed ETFs.
- Leveraged ETF market shareAbout 4%Although it has rebounded recently, its overall share has declined since 2021.
- Year-to-date retail inflows into plain ETFsAbout US$14bnSignificantly higher than leveraged ETF inflows.
- Year-to-date retail inflows into leveraged ETFsAbout US$2bnShows that leveraged ETF flows are relatively limited.
- Margin financing balanceClose to KRW35tn to 36tnThe absolute amount has increased, but the share of total market capitalization has fallen to about 0.5%.
- Net foreign outflows from the KOSPIAbout US$62bnMainly driven by the two large semiconductor names.
- Foreign outflows related to the two large semiconductor namesAbout US$57bnExplains most of the foreign selling pressure in the KOSPI.
- Foreign ownership in semiconductorsAbout 50.5%Below the long-term average, about -1.7 standard deviations.
- Estimated cumulative selling pressure related to diversification requirementsAbout US$69bnEstimated cumulative amount since late October.
- Potential additional outflow for each 1 percentage point increase in weightAbout US$2bnEstimated based on current AUM of Korean thematic funds and diversification constraints.
- KRW versus the US dollar this week-1.3%It also weakened 1.0% versus JPY and 1.1% versus EUR.
- Korean equity risk indicatorGSSRKERB Index at -0.1Recovered to a risk-neutral range.
Impact & implications
For investors, the implication is that Korean equities are seeing improved short-term sentiment and earnings revisions, but the funding backdrop still presents structural headwinds. Leveraged ETFs themselves may not be the main systemic risk; the real issues are low foreign ownership in semiconductors, passive selling pressure caused by overweight positions in the two large semiconductor names, and whether market gains can broaden into defense, shipbuilding, power infrastructure, and other sectors. If leadership broadens, the probability of renewed foreign inflows may rise; if semiconductor weights continue to increase, diversification constraints could keep generating mechanical selling.
Risks
- Continued net foreign outflows from the KOSPI and semiconductors.
- Further increases in the weights of the two large semiconductor names, triggering more mechanical selling under diversification constraints.
- Market gains becoming too concentrated in a handful of heavy-weight stocks, leaving breadth insufficient.
- The launch of single-stock leveraged ETFs potentially increasing retail trading volatility.
- Continued KRW weakness potentially weighing on foreign appetite for Korean equities.
- Changes in plain ETF and leveraged ETF flows that could alter the current view that leverage risk is mild.
What to watch
- Trading volume, fund flows, and retail participation after the launch of single-stock leveraged products on May 27.
- Whether domestic stock leveraged ETF AUM share continues to recover from about 4%.
- Whether net foreign outflows from the KOSPI slow, especially flows related to the two large semiconductor names.
- Whether foreign ownership in semiconductors recovers from the 10-year low.
- Whether the combined weight of the two large semiconductor names in the index continues to exceed diversification thresholds.
- Whether defense, shipbuilding, power infrastructure, and other sectors can take over leadership and improve market breadth.
- Whether 12-month forward EPS revisions for the KOSPI can continue.
- The KRW's moves versus USD, JPY, and EUR.
- Whether the GSSRKERB Index remains in or improves within the risk-neutral range.