South Korea’s KOSPI has fallen about 28% from its June high as leveraged positions in exchange-traded funds and hedge funds were rapidly cut back, but JPMorgan has kept its 12-month target for the benchmark at 12,500 points, according to a July 21 report.
The sharp decline has been driven less by a broad collapse in corporate fundamentals and more by the unwinding of crowded trades, concentrated foreign selling and a steep reduction in borrowed exposure, the report said. The pressure has centered on Korean equities linked to artificial intelligence, semiconductors and industrial supply chains, areas that had previously attracted heavy positioning during the market’s rally.
JPMorgan estimated that the KOSPI closed near 6,516 points on July 21, about 28.5% below its record close of 9,114.55 on June 22. Despite the size of the pullback, the bank said the market’s longer-term outlook remains supported by rising earnings expectations, particularly in technology and industrial shares tied to AI infrastructure demand.
The correction has also sent a wider warning across global risk markets, including digital assets, where traders are watching whether forced selling in Asian equities could spill over into other volatile markets. Crypto-linked assets have shown signs of partial separation from traditional technology stocks in recent sessions, but analysts and traders remain cautious because leverage can quickly turn short-term price moves into forced liquidations.
Leverage unwind drives the selloff
The largest source of pressure has come from leveraged ETFs tied to South Korean shares. JPMorgan’s data showed that leveraged ETF exposure to Korean equities dropped from about $50 billion at the end of June to $26 billion, a decline the report described as a 75% reduction in exposure.
The fall does not appear to reflect a simple rush by traders to exit the market entirely. Total inflows into these products remained modestly positive, but falling asset prices cut the amount of leverage embedded in the market. That suggests the decline was partly caused by passive deleveraging, where losses reduce the size of leveraged positions automatically and force funds to rebalance.
This mechanism can deepen selloffs. When leveraged products are forced to reduce exposure after a decline, their selling can add downward pressure to already weak markets. In Korea’s case, the effect was magnified by the popularity of leveraged products tied to single stocks and high-momentum sectors.
Hedge funds also reduced exposure sharply. JPMorgan’s prime brokerage data showed that multi-strategy and long-short managers cut gross leverage ratios from above 5.5 times to below 4 times. That marks a significant reduction in risk, but the report noted that leverage remains above historical median levels and that swap-financing capacity is still tight.
The message from the data is that the market has already gone through a major cleanup, but not a complete one. A large portion of the forced selling may have passed, yet financing conditions and volatility remain too unstable to support a quick return to the calm that existed before the selloff.
Foreign selling focuses on chip leaders
Foreign outflows from Korean equities have exceeded $110 billion since January, according to the report. Nearly 90% of that selling came from Samsung Electronics and SK Hynix, South Korea’s two dominant memory-chip companies.
That concentration is important because both companies had become central to the global AI trade. As demand for advanced chips, high-bandwidth memory and data-center hardware increased, Samsung Electronics and SK Hynix drew heavy attention from global funds and benchmark-linked products. Their large index weightings made them natural targets for traders seeking exposure to AI-related growth outside the United States.
When the trade reversed, the same concentration worked in the opposite direction. JPMorgan said the two companies’ combined weightings in the MSCI Emerging Markets index dropped from 9.5% and 8.3% in late June to 7.5% and 5.7%, respectively. As those weights normalize, the report suggested that passive outflows tied to benchmark adjustments could begin to ease.
Still, the size of the selling shows how dependent the Korean market had become on a narrow group of companies. The earlier rally was not evenly spread across the full market. Instead, it was heavily driven by semiconductor and industrial names linked to AI infrastructure spending. That made the KOSPI more vulnerable when traders began cutting exposure to the most crowded positions.
Volatility remains unusually high
Although leverage has fallen, market volatility remains far above normal. JPMorgan said the ratio of Korea’s VKOSPI volatility index to the U.S. VIX is near five times, compared with a more typical level of around one time.
That gap shows that short-term calm has not returned. Even after major position reductions, traders continue to demand a much larger risk premium for Korean equities than for U.S. stocks. Elevated volatility can make it harder for funds to rebuild positions, especially when financing costs are higher and margin requirements are tighter.
High volatility also discourages short-term buyers from stepping in aggressively. When daily price swings are large, traders using leverage face a higher risk of forced selling if prices move against them. That can keep liquidity thin and increase the chance of sudden moves in either direction.
The current environment is therefore different from a normal pullback. A standard correction might attract dip-buying from traders who believe earnings remain intact. But when volatility is extreme and financing is constrained, even traders with a positive view may wait for clearer signs that forced selling has ended.
Momentum reversal hits crowded trades
The report also pointed to a sharp reversal in momentum factors. Four-week price-momentum drawdowns averaged minus 26%, showing that the stocks with the strongest prior inflows suffered the steepest declines.
This type of move is common when a crowded trade unwinds. Shares that rise fastest during a rally often attract more short-term capital, especially from systematic and momentum-focused strategies. When the trend breaks, those same strategies can exit quickly, producing outsized losses in the previous winners.
In South Korea, this reversal hit AI-linked semiconductor and industrial names particularly hard. The same group that benefited from rising expectations for data centers, memory chips and automation spending became the center of the correction.
JPMorgan said the earlier rally and the later decline were both amplified by crowded positioning. In other words, the selloff was not simply a judgment that Korean companies had become weaker. It was also the product of market structure, leverage and the speed at which traders moved out of the same positions at the same time.
Margin debt is not the main risk
Compared with other major markets, South Korea’s margin debt does not appear unusually high. JPMorgan estimated that margin debt in South Korea totals about $21 billion, equal to roughly 0.5% of total market capitalization.
That compares with about 1.9% in the United States and about 2.8% for China’s A-shares. On this measure, Korea does not look especially stretched.
The bigger issue is the footprint of leveraged ETFs. Leveraged ETFs account for about 0.7% of South Korea’s market capitalization, compared with roughly 0.3% in the United States and close to zero for China’s A-shares.
That difference helps explain why the Korean market reacted so sharply. Even if margin borrowing by individual traders is not excessive, the presence of leveraged ETF products can create automatic selling pressure when prices fall. The risk is not only who borrowed money directly, but how much leverage is embedded in products that must rebalance mechanically.
This structure can make markets more fragile during periods of stress. A drop in prices lowers the value of leveraged funds, which then need to sell assets to maintain target leverage. That selling can push prices lower and trigger another round of rebalancing.
Regulators move to curb speculative products
South Korean regulators are also taking steps to limit speculative activity in leveraged products. On July 16, the Financial Services Commission said it would halt listings of single-stock leveraged, inverse and covered-call products.
The regulator also plans to raise minimum deposit thresholds from KRW 10 million to KRW 30 million on August 5. It will require all-cash initial margins by August 19 and increase the minimum trading unit of such products to 20 shares starting in November.
The measures apply only to single-stock products, but they are expected to slow any rapid rebuilding of speculative exposure. Retail traders remain active in the market, but higher entry requirements and stricter margin rules could reduce the speed at which leverage returns.
The timing is notable. Regulators are acting after a period in which single-stock leveraged products became a meaningful part of trading activity. That growth gave retail traders easier access to amplified exposure, but it also increased the risk of sharp losses during sudden market reversals.
By tightening rules, authorities appear to be trying to reduce the chance that another wave of speculative buying builds too quickly around the same crowded themes.
Earnings forecasts continue to rise
Despite the market decline, earnings expectations for Korean companies have continued to improve. JPMorgan said consensus forecasts for 2026 earnings per share across the Korean market rose 143.4% over the past six months.
The upgrades were especially strong in technology, where forecasts increased 215.5%. Industrial companies saw a 91.0% upward revision. These changes reflect optimism that AI-related demand will support memory chips, servers, power equipment, factory automation and other parts of the data-center supply chain.
This is the main reason JPMorgan maintained its 12-month KOSPI target at 12,500 points. If earnings growth continues and the market finishes reducing leverage, the recent decline could prove to be a severe but temporary correction rather than the start of a sustained downturn.
However, the earnings outlook depends heavily on the durability of AI capital spending. If major technology companies slow data-center expansion, or if new technologies reduce demand for advanced memory and server components, the upgrades could be reassessed.
Other sectors have not shown the same strength. Materials and consumer-related companies are recovering more slowly, meaning the broader market still depends heavily on the technology and industrial cycle.
Crypto traders watch for spillover risk
The decline in Korean equities is also being watched by traders in digital assets because sharp deleveraging in one major market can influence risk appetite elsewhere. When funds reduce exposure quickly, they may sell other liquid assets to raise cash or lower portfolio volatility.
Recent market data cited by derivatives trackers showed that more than $432 million in long crypto positions were liquidated in one day on July 17 across decentralized token platforms and related venues. Long liquidations reportedly outpaced short liquidations by about 5.5 to 1, suggesting that bullish leveraged positions were hit hardest during the move.
That development does not prove that Korean equity selling directly caused crypto liquidations. But it shows that leverage remains a common vulnerability across fast-moving markets. When prices fall quickly, traders using perpetual futures or other leveraged products can face automatic liquidations if they do not add collateral.
Some large digital tokens have recently moved differently from traditional technology shares. While major tech-heavy equity benchmarks came under pressure, Bitcoin traded above $65,000 during the same broad period. That divergence has led some market participants to argue that digital assets are beginning to behave less like high-growth technology stocks and more like alternative macro assets.
Even so, the separation is not complete. Crypto markets remain highly sensitive to liquidity, leverage and funding conditions. A period of stress in equities can still affect digital assets if traders reduce risk across multiple markets at once.
Funding conditions remain central
For both Korean equities and digital assets, the key issue is not only price direction but funding pressure. Tight financing can turn a manageable decline into a forced deleveraging event.
In Korean equities, swap-financing capacity remains limited, according to JPMorgan. Hedge funds have reduced gross exposure, but leverage has not returned to historically low levels. In crypto derivatives, perpetual funding rates have been close to neutral, which suggests neither bullish nor bearish leverage is overwhelmingly dominant at the moment.
Neutral funding can be stabilizing, but it does not remove risk. If volatility rises suddenly, leveraged traders can still be forced out of positions. That is why market participants are paying close attention to daily swings, collateral requirements and liquidity depth.
The next phase for the KOSPI will likely depend on whether three conditions improve at the same time: volatility needs to decline, foreign selling pressure needs to ease, and earnings upgrades in AI-linked industries need to hold. If those factors align, the market could begin to rebuild confidence after the rapid correction.
If they do not, the risks remain clear. Crowded positions may have been reduced, but technology demand is still a major driver of the earnings outlook. Funding remains tight, and volatility is still elevated. For now, South Korea’s equity market is no longer in the same highly levered position it was in late June, but it has not yet returned to a stable footing.
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