Key Takeaways:
Two of Wall Street's biggest banks published opposing verdicts on the same day on whether South Korea's KOSPI crash has washed out the leverage that drove the selloff.
South Korea's KOSPI has lost nearly 40% since June 22, and two top banks now disagree on whether the forced selling that drove the collapse is finished — a split that determines whether the market is near a bottom or facing more pain from retail margin calls.
"Institutional deleveraging is about 90% complete," JPMorgan's equity macro research team said in a July 29 report, pointing to hedge fund long-short ratios that have fallen from 5.7 times to 3.2 times. "The worst of the positioning unwind is behind us."
HSBC's Asia equity strategy team pushed back the same day, arguing that the real risk sits with Korean retail investors. Margin debt stood at 32 trillion won ($22 billion) as of July 27, only 15% below its June peak, with forced liquidations covering just 2% of the total, the bank said. Single-stock leveraged ETFs have shrunk to about $10 billion from a peak near $30 billion, but HSBC attributed the decline to capital losses rather than investor exits — meaning retail investors are still holding the positions.
The answer matters for more than just KOSPI's direction. If JPMorgan is right, the index's forward price-to-earnings ratio of 5 times — levels the bank called "crisis territory" — offers a contrarian entry point. The last time KOSPI traded below 6 times forward earnings was during the 2008 global financial crisis, preceding a 12-month rebound of more than 40%. If HSBC is correct, another wave of retail margin calls could push stocks lower, with the memory chip narrative already shifting as SK Hynix trades 53% below its high and Samsung Electronics 43% below.
The $40 Billion Leverage Gap
The divergence between the two banks centers on who holds the remaining risk. JPMorgan sees the institutional channel as the primary driver of the selloff and views its normalization as the key signal. Leveraged ETF assets linked to Korean stocks peaked at $50 billion in late June — four times the relative size of comparable U.S. products — before collapsing to $17 billion, with inflows "essentially stalled," the bank said. Hedge fund prime brokerage data showed the long-short ratio retreating toward the upper end of its 2025 range, suggesting the bulk of forced position-cutting is done.
HSBC counters that the institutional unwind is only half the story. Korean retail investors still carry 32 trillion won in margin debt, and unlike institutional players, they have shown no sign of actively reducing exposure. The bank noted that retail investors continue buying both single-stock leveraged ETFs and index-linked products even as prices fall, a pattern that historically precedes a second wave of forced selling when margin calls eventually hit.
Foreign flows add another layer. Overseas investors have sold more than $110 billion of Korean stocks this year, with 90% of that concentrated in two memory chip stocks — Samsung Electronics and SK Hynix. JPMorgan argued that passive selling pressure has eased as those stocks' combined weight in the MSCI Emerging Markets index dropped to 11% from 17.8% in June. But the fundamental backdrop for memory chips is deteriorating: Chinese rival CXMT raised $9.8 billion through a Shanghai IPO, adding supply-side pressure, while New York state imposed the first U.S. moratorium on large data center construction, clouding AI-driven demand.
Regulators Tighten Rules Before the Damage Spreads
South Korea's Financial Services Commission moved to tighten leverage rules, accelerating the effective date to July 31 from an originally planned August timeline. The measures raise the minimum margin requirement for retail investors in single-stock leveraged ETFs to 30 million won from 10 million, payable in cash only — no securities collateral. The FSC also suspended new listings of such products and plans to increase the minimum trading lot from one share to 20.
The regulatory intervention followed public apologies from top policymakers as investors nursing losses in leveraged products demanded accountability. HSBC warned that the new rules may reduce inflows into single-stock leveraged ETFs but noted that investors could shift to other leverage tools, leaving the broader deleveraging risk intact. An additional headwind comes from a reduction in tax exemptions on RIA accounts, which will fall to 50% from 100% starting in August, potentially further dampening retail participation.
JPMorgan, for its part, identified four diversification themes for investors willing to look past the near-term uncertainty: wealth-effect beneficiaries such as department stores, cosmetics, tourism, and brokerages; biotech stocks trading at deep discounts to KOSPI; preferred shares where the discount to common stock is near historical extremes; and banks benefiting from improving asset quality, rising interest income, and higher brokerage revenue from elevated trading volumes.
This article is for informational purposes only and does not constitute investment advice.
