Retail Investors Regain Hope: "Leverage Unwinding Nears End, KOSPI 12,500 Target Intact," Says J.P. Morgan

Leverage ETFs Amplify Downturn
"Significant Easing of Selling Pressure"

J.P. Morgan has maintained its 12-month price target for the Korean stock market at 12,500 points, stating, “The fundamentals of the Korean market remain solid despite some concerns.”

As the KOSPI, which showed mixed trends with repeated fluctuations in the early trading session, turned to an upward trend, employees are monitoring the stock market and exchange rates in the dealing room of Hana Bank headquarters in Jung-gu, Seoul on the 21st. 2026.7.21 Photo by Yongjun Cho

On July 21, J.P. Morgan announced in its Korea equity strategy report that it would keep its 12-month target for the KOSPI unchanged. The investment bank evaluated that the recent market correction was not the result of deteriorating corporate fundamentals, but rather a combination of leveraged positions being unwound and foreign investor supply-demand factors. J.P. Morgan also predicted that once the market normalizes, the long-term upward trend could continue.

J.P. Morgan explained, “Initially, the correction was triggered by the usual concerns over fundamentals and by sector rotations, but leveraged ETFs subsequently amplified the declines, and more recently, hedge fund position unwinding has played a more significant role.” The report continued, “Over the past six to seven weeks, we have continuously pointed out elevated market volatility and the possibility of forced selling by foreign investors. This process is serving as a self-correcting mechanism that allows the market to cool off on its own. At this point, the central issue is how much the abnormal market environment will normalize.”

J.P. Morgan analyzed that the net assets under management (AUM) of leveraged ETFs based on Korean equities, which reached USD 50 billion at the end of June, have now dropped to approximately USD 26 billion. This represents about 75% progress through the liquidation process, indicating that the downward trend is nearing completion. J.P. Morgan also assessed that, according to its prime brokerage data, the long-short (LS) ratio has dropped from the previous level of 5.5 times to less than 4 times now, demonstrating that hedge fund deleveraging has progressed by over 50%. J.P. Morgan noted, “The size of leveraged ETFs is likely to shrink further going forward,” estimating an appropriate scale at roughly USD 18 billion (about KRW 2.65 trillion).

Stricter government regulations are also expected to accelerate the reduction of leverage. Starting in August, the government will raise the minimum deposit required from KRW 10 million to KRW 30 million and implement a system that recognizes only cash as initial margin. The listing of new single-stock leveraged ETFs will be suspended for the time being, and from November, the minimum trading unit will increase from 1 share to 20 shares.

Currently, the balance of margin loans held by retail investors has declined from about USD 25 billion to USD 21 billion, which accounts for roughly 0.5% of the total stock market capitalization. J.P. Morgan pointed out that this figure is lower than the United States (1.9%) and China A-shares (2.8%), indicating it is not a significant concern.

The bank also highlighted the easing of foreign investor supply-demand pressures. J.P. Morgan stated, “As the market capitalizations of Samsung Electronics (005930) and SK hynix (000660) have grown, foreign investors have had no choice but to reduce their weightings each time share prices rose due to the investment limits imposed by Emerging Markets (EM) fund mandates. However, with the recent correction in memory semiconductor stocks, their weightings within the MSCI Emerging Markets (MSCI EM) Index have dropped to 7.5% for Samsung Electronics and 5.7% for SK hynix, meaning that much of the foreign investor selling pressure has been alleviated.” This represents a significant decrease from respective weightings of 9.5% and 8.3% at the end of June.

Additionally, concerns about sluggish demand for memory semiconductors were described as excessive. While the emergence of open-source models has raised questions regarding the monetization of model layers, the economics of data center rentals by hyperscalers remain positive. Some forecast that technological advances may eventually reduce memory usage, but this has not materialized yet.

J.P. Morgan cited not only AI but also asset effects benefiting financial and consumer sectors, as well as improvements in corporate governance, as long-term positives for the Korean equity market. In particular, the firm forecast that corporate governance reform is likely to regain attention as a major investment theme in the second half of this year.

This content was produced with the assistance of AI translation services.