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2026-07-30 12:26:11 JPM published a report stating that since mid-Jun, the South Korean market has experienced an intense deleveraging period. The KOSPI Index has now fallen nearly 40% from its peak on Jun 22, with extremely high volatility. Initially triggered by conventional fundamental concerns and rotational fund flows, the move was later amplified by leveraged ETFs, and has increasingly shown characteristics of hedge fund position unwinding in recent days. Following last week's update, when it estimated that around 75% of leveraged ETF liquidation and more than 50% of equity hedge fund deleveraging had been completed, the bank now believes leveraged ETF liquidation has been completed, while hedge fund deleveraging is around 90% complete, both reaching acceptable levels. Although the price damage seen this week will likely continue to generate residual spillover effects in the coming days, further driving deleveraging, and many investors remain cautious ahead of this week's Federal Reserve meeting and earnings reports from hyperscale cloud computing companies, positioning in Korea currently appears attractive overall, supported by cheap valuations and earnings momentum. The bank noted that leveraged ETF assets under management have normalized. Leveraged ETF assets linked to Korea had surged to USD50 billion at the end of Jun. Relative to market size, this was four times the level seen in the US, resulting in very significant volatility. As the market reversed, assets in such products have now fallen back to USD17 billion. In addition, the rapid fund inflows previously seen into these products have recently stalled, with limited dip-buying activity. Therefore, the VKOSPI-to-VIX ratio has started to decline and may fall further. The report stated that hedge fund leverage has almost normalized, and due to the unwinding of price momentum factors on Jul 28 and 29, hedge fund leverage likely declined further and is now not far from the upper end of the 2025 range. Meanwhile, retail leverage risk through margin financing remains relatively low. Margin balances were never particularly high and did not see rapid growth. Current balances have eased slightly to around USD20 billion. Moreover, unlike leveraged ETFs, which undergo forced deleveraging whenever spot prices decline, margin loans have buffers and discretionary flexibility. South Korean retail investors still possess ample stock gains, cash balances, higher income and overseas assets that can be utilized if necessary to meet any margin calls and maintain positions. In addition, the report said record foreign capital outflows are slowing. As Korea, especially memory-related stocks, underperformed, selling pressure from long-term funds has eased substantially, meaning the weighting of the two major heavyweight stocks in the MSCI Emerging Markets Index is now only 6.5% and 4.5%, compared with 9.5% and 8.3% at the end of Jun. (ha/a)~ AASTOCKS Financial News Website: www.aastocks.com This article was automatically translated by AI, the Chinese version should be considered the authoritative version. AASTOCKS.com Limited does not guarantee its accuracy or completeness and accepts no liability for any damages or losses arising from the use of this translation. | |