Two leading global investment banks have issued contrasting assessments on the deleveraging process in the South Korean market on the same day.

The KOSPI index has plummeted nearly 40% from its June 22 peak. This decline was initially triggered by fundamental concerns and fund rotations, which were subsequently amplified by forced liquidations of leveraged ETFs and recently compounded by a concentrated unwinding of hedge fund positions. The market has experienced a severe structural shock in a short period.

JPMorgan Chase: Institutional Deleveraging is Nearing Its End, Valuations at 'Crisis Levels'

In a report dated July 29, JPMorgan Chase's equity macro research team indicated that the deleveraging process in the South Korean market has progressed significantly.

Regarding leveraged ETFs, the size of ETFs focused on South Korean assets swelled to $50 billion at the end of June, which was four times the relative market capitalization of comparable US products, serving as a core amplifier of this volatility. As the market declined, this size has contracted to $17 billion, with recent capital inflows noticeably stalling. The bank believes that deleveraging in this segment is "substantially complete."

For hedge funds, JPMorgan Chase's prime brokerage data shows that the long/short ratio for the Korean market fell from a peak of 5.7 times to 3.2 times as of July 27. Combined with a significant reversal in price momentum factors between July 28 and 29, the bank estimates that hedge fund deleveraging is approximately 90% complete, "approaching the upper end of the 2025 range."

On retail margin financing, JPMorgan Chase's assessment is relatively optimistic. The current margin balance stands at around $20 billion, not showing a rapid increase, and its ratio to market capitalization has actually been declining this year. The bank argues that Korean retail investors still hold ample stock gains, cash reserves, and overseas assets, giving them the capacity to meet margin calls, and that "retail investor leverage risk is relatively controllable."

Regarding foreign investors, cumulative net selling of Korean stocks by foreign investors has exceeded $110 billion year-to-date. However, the bank notes that 90% of this outflow was concentrated in just two memory chip leaders. As these stocks' weightings in the MSCI Emerging Markets Index have fallen from 9.5% and 8.3% at the end of June to 6.5% and 4.5%, respectively, passive selling pressure has been significantly alleviated.

On the valuation front, the bank points out that the KOSPI's forward price-to-earnings ratio has dropped to 5 times, and free cash flow valuation is also at "crisis levels." Combined with improved positioning, the overall configuration appeal has emerged.

HSBC Holdings PLC: Retail Leverage Remains High, Deleveraging Far from Over

HSBC Holdings PLC's Asia-Pacific equity strategy team adopted a more cautious stance on Korea's deleveraging process in a report released the same day.

HSBC's primary concern lies in the retail margin balance. Data shows that as of July 27, the retail margin balance in South Korea was approximately 32 trillion Korean won (about $22 billion), down only about 15% from the peak in June and "still at a high level." While forced liquidations increased in July, the liquidated margin balance accounted for only 2% of the total, indicating very limited deleveraging progress.

Another focus for HSBC is single-stock leveraged ETFs. The size of these products has shrunk from its peak to about $10 billion, roughly one-third of the peak. However, HSBC emphasizes that this shrinkage is "primarily driven by capital losses, not active investor exit"—retail investors continue to buy, whether in single-stock leveraged ETFs or index-linked products. This judgment represents a clear divergence from JPMorgan Chase, which views the decline in ETF size as a sign of completed deleveraging, whereas HSBC believes the scale contraction stems from losses rather than withdrawals, meaning potential risks have not been truly released.

Regulatory Intervention: FSC Tightens Leveraged Product Rules Ahead of Schedule

In response to severe market volatility, the Financial Services Commission (FSC) of South Korea has taken action.

Specific measures include raising the minimum margin requirement for retail investment in single-stock leveraged ETFs from 10 million Korean won to 30 million Korean won, payable only in cash, not securities; suspending the listing of new single-stock leveraged ETFs; and planning to increase the minimum trading unit for domestically listed single-stock leveraged products from 1 share to 20 shares. The implementation timeline for these measures has been moved up from August to July 31.

HSBC notes that while these measures should reduce capital inflows into single-stock leveraged products, "investors may continue to use other leverage tools," and the overall scope for deleveraging remains.

Additionally, the bank warns that the tax exemption available through RIA accounts will be reduced to 50% starting in August, which could further influence retail investor behavior.

Fundamental Pressures: The Memory Chip Narrative Is Shifting

Both reports reference the fundamental backdrop of the South Korean market decline.

SK Hynix has fallen 53% from its June high, and Samsung Electronics has dropped 43%. HSBC believes the narrative around AI trading is shifting, with multiple factors creating pressure: memory chip makers are beginning to sign long-term contracts, leading to more conservative expectations for price upside; questions remain about whether hyperscaler data center operators can effectively monetize their high capital expenditures; New York State has become the first US state to impose a moratorium on large-scale data center construction; and Chinese memory chip manufacturer ChangXin Memory Technologies has raised $9.8 billion through a Shanghai STAR Market listing, increasing supply-side pressure.

JPMorgan Chase, through model calculations, points out that current market pricing implies an assumption that memory chip prices will begin to revert to pre-AI levels by early 2027. For every additional year that current price levels are maintained, the corresponding valuation increment is approximately $150 billion.

Diversification Opportunities: JPMorgan Chase Highlights Four Thematic Lines

Against the backdrop of improved positioning and valuation recovery, JPMorgan Chase has proposed four diversification directions:

"Wealth Effect" Beneficiaries: Department stores, cosmetics, tourism, brokerages, and construction sectors stand to benefit from consumption upgrades driven by rising household asset values.

Biopharmaceuticals: This sector has significantly underperformed the KOSPI and could benefit from improved sentiment in the global healthcare sector.

Preferred Stock Discounts: The discount levels are near historical extremes, offering attractive dividend yields.

Banking Stocks: The sector is supported by a triple tailwind of improving asset quality alongside interest income growth, a favorable net interest margin (NIM) environment from the Bank of Korea's rate hike cycle, and increased brokerage income from rising market volumes.