JP Morgan maintained its 12-month KOSPI target of 12,500 in a report released on the 21st, citing approximately 75% completion of leverage ETF liquidation to appropriate levels and stabilizing foreign investor selling. The global investment bank attributed recent market volatility to forced deleveraging of leverage ETFs, which had grown to $50 billion by end of June. KOSPI has fallen approximately 28% from its June 19 high of 9385.59, with leverage products amplifying the correction despite solid corporate fundamentals in the Korean stock market.
JP Morgan Maintains Overweight Rating on Korean Stocks
According to the financial investment industry on the 22nd, JP Morgan released a report titled 'Korea Equity Strategy: Update on Korea's Deleveraging' maintaining its 'Overweight' rating on Korean stocks and its 12-month KOSPI target of 12,500. The KOSPI index fell approximately 28% from its June high of 9385.59 on the 19th, giving back most of its gains within one month in a sharp short-term correction.
Leverage ETFs Identified as Primary Volatility Driver
JP Morgan identified leverage ETFs as the main culprit behind expanded volatility. Various leverage products, from ETFs that track twice the daily returns of indices like KOSPI200 to single-stock leverage products for Samsung Electronics and SK Hynix, amplified market volatility. JP Morgan stated that "Korea's corporate fundamentals remain solid, but intense deleveraging has pulled down stock prices."
JP Morgan noted that "a correction that began with typical fundamental concerns and rotational selling was amplified through leverage ETFs, and recently strong hedge fund position liquidation has been observed." The firm analyzed that "as the Korean stock market rose steeply over the past year, leveraged funds from retail investors, long-short hedge funds, and macro funds became concentrated."
Deleveraging Process 75% Complete According to JP Morgan Analysis
JP Morgan reported that "net assets of leverage ETFs based on Korean assets increased to $50 billion by end of June, reaching approximately four times the U.S. level relative to market size." The firm analyzed that "forced deleveraging occurred during each market decline, and Korea's volatility index (VKOSPI) expanded to approximately five times the U.S. volatility index (VIX) level."
JP Morgan stated that "leverage ETF liquidation is approximately 75% complete in the process of reducing to the appropriate level judged to be approximately $18 billion, and hedge fund deleveraging is estimated to be more than half complete." The firm reported that "due to recent market corrections, the size of leverage ETFs based on Korean assets has decreased to approximately $26 billion."
FAQ
What is JP Morgan's current KOSPI target?
JP Morgan maintained its 12-month KOSPI target at 12,500 in a report released on the 21st, keeping its 'Overweight' rating on Korean stocks.
How much leverage ETF liquidation has occurred according to JP Morgan?
JP Morgan reported that leverage ETF liquidation is approximately 75% complete in the process of reducing from $50 billion at end of June to an appropriate level of approximately $18 billion, with current levels at approximately $26 billion.
Why did KOSPI experience high volatility according to JP Morgan?
JP Morgan identified leverage ETFs as the primary driver of volatility, stating that forced deleveraging during market declines amplified corrections and caused VKOSPI to expand to approximately five times VIX levels.
