JPMorgan, in a research note dated July 21, estimated that South Korea’s KOSPI stock index had already fallen back about 28% from the June 22 closing high of 9,114.55 points; around July 21, it hovered near 6,516 points. The report characterizes this leg of sharp selloff as leverage-driven deleveraging/forced unwinds and adjustments to concentrated positioning. Key de-risking data: the size of leveraged ETFs tied to Korean underlyings fell from about $5 billion at the end of June to $2.6 billion.
KOSPI falls from the June peak to around 6,516 points
KOSPI hit a record closing high on June 22 at 9,114.55 points. Since then it kept dropping; in early July, it was already down more than 20% from the peak. Around July 21 it was near 6,516 points, a decline of about 28.5% from the peak. The VKOSPI-to-VIX ratio is close to 5x, far above the normal level of about 1x, indicating that volatility in Korea’s domestic market is far higher than in the U.S. market.
JPMorgan explains this sharp selloff as an exodus from overly crowded trades—rather than a sudden deterioration in fundamentals. The price momentum factor’s four-week drawdown is close to -26%, also suggesting that the stronger the prior rally and the more crowded the fund positioning in those assets, the more pressure they face.
Leverage ETF deleveraging progress: $5 billion down to $2.6 billion
According to JPMorgan’s research note, AUM for leveraged ETFs tied to Korean underlyings fell from about $5 billion at the end of June to about $2.6 billion currently, with deleveraging progress of about 75%. This is close to the roughly $1.8 billion size JPMorgan considers more acceptable. Notably, cumulative net inflows during the same period remain positive; the reduction in size mainly comes from passive contraction driven by declines in the underlying market prices.
JPMorgan’s Prime ledger shows that deleveraging by equity hedge funds is already over 50%. The long/short ratio has fallen from a peak of more than 5.5x to below 4x. In a cross-comparison, South Korea’s Margin Balance is about $21 billion (about 0.5% of market cap), while leveraged ETFs are about $2.6 billion (about 0.7% of market cap). By comparison, the U.S. Margin Balance as a share of market cap is about 1.9%, and U.S. leveraged ETFs are about 0.3%. In China’s A-shares, margin as a share is about 2.8%.
Structure of foreign flows: more than $110 billion year-to-date, about 90% concentrated in Samsung Electronics and SK Hynix
By JPMorgan’s definition in its July 21 research note, foreign capital has net sold South Korean equities by more than $110 billion year-to-date, with about 90% coming from the two major memory stocks—Samsung Electronics and SK Hynix. The weights of the two memory stocks in the MSCI EM Index have been clearly reduced over the same period: Samsung Electronics fell from 9.5% at the end of June to 7.5%, while SK Hynix fell from 8.3% to 5.7%.
JPMorgan says this kind of concentrated outflow is different from a full withdrawal from the South Korean market. If foreign capital is mainly concentrated in two memory stocks with very high weights, then as index weights decline and position constraints ease, ongoing sell pressure may ease somewhat.
South Korea Financial Services Commission regulatory measures: higher minimum margin and product restrictions
The Financial Services Commission (FSC) of South Korea announced a set of regulatory measures targeting single-stock leveraged products on July 16, 2026:
Suspension of new listings: suspend new listing applications for single-stock leveraged, inverse, and covered call products
Higher minimum deposit requirement: raised from 10 million Korean won to 30 million Korean won, expected to be implemented on August 5, 2026
Initial margin calculation method: starting August 19, 2026, initial margin will count cash only
Higher minimum trading unit: starting November 2026, the minimum trading unit for listed single-stock leveraged products in South Korea is raised from 1 share to 20 shares
FAQ
Why does JPMorgan keep an overweight stance on the South Korean market even after the KOSPI plunges 28%?
JPMorgan, in its July 21 research note, believes this sharp selloff mainly stems from leverage unwind/forced deleveraging and adjustments to concentrated positioning, rather than a sudden deterioration in fundamentals. The firm maintains its 12-month KOSPI target of 12,500 points on the premise that leverage clearing continues (the ETF deleveraging progress has reached 75%), the durability of AI demand is not falsified, and concentrated selling pressure from foreign capital eases.
When do the FSC’s new rules for leveraged products take effect, and what are the specific measures?
The FSC announced on July 16, 2026: suspending new listings for single-stock leveraged, inverse, and covered call products; increasing the minimum deposit requirement—expected to rise from 10 million Korean won to 30 million Korean won on August 5; initial margin will count cash only starting August 19; and the minimum trading unit will rise from 1 share to 20 shares starting in November.
How large is the upward revision to South Korea’s 2026 EPS?
According to JPMorgan’s research note, South Korea’s 2026 EPS has been revised up by 143.4% over the past six months; within that, the technology sector is up 215.5% and the industrial sector is up 91.0%. The upgrades are mainly concentrated in AI-related technology and the industrial supply chain. The continuing durability of AI capital expenditures remains the core risk factor for whether the subsequent earnings upgrades can be sustained.
