Key Takeaways:
Morgan Stanley upgraded South Korean stocks to overweight, saying the recent leverage washout leaves 36 percent upside to its 9,000-point Kospi target.
"The recent selloff was mainly technical and we are past the midpoint of unwinding leveraged ETFs, hedge fund leverage, and retail margin," strategists led by Daniel K. Blake at Morgan Stanley said in a note.
The bank's Asia emerging-market equity strategy team set the Kospi target at 9,000, implying about 36 percent upside from current levels. The index trades at 5.7 times forward earnings, the second percentile of its 10-year range and below its prior historical low. Asian hedge funds have completed about 75 percent of their deleveraging, with gross exposure to Korea down 28 percent from a 3.8 percent peak to 2.7 percent. Assets in leveraged exchange-traded funds tied to Samsung Electronics Co. and SK Hynix Inc. have shrunk about 70 percent to $11.8 billion from a $40 billion June peak, while short gamma on those funds fell 67 percent to $288 million.
The Kospi has tumbled more than 30 percent from its June high, and Morgan Stanley sees the index trading in a near-term range of 5,500 to 10,500. Its capitulation index has fallen to minus 2.53, the lowest since 2008 outside crisis periods, a level that historically preceded rebounds of 10 to 30 percent within 30 trading days.
Morgan Stanley named three drivers for Korean chip stocks: capital-management announcements from Samsung and SK Hynix, HBM4 pricing above $3 per gigabit, and the iPhone 18 launch cycle in September, which it expects to lift shipments 5 to 10 percent. Consensus forecasts MSCI Korea earnings per share to grow 312 percent in 2026, with a compound annual growth rate of about 20 percent through 2028, above projections for the United States and India.
The bank said valuations for Samsung Electronics and SK Hynix should support the market's floor, and it favors industrials, defense, and financials. South Korean regulators have stepped in to curb retail use of leveraged products, including capping exposure at a set portion of investors' total portfolios. Morgan Stanley separately upgraded Thai equities to overweight and cut Australia to underweight.
The upgrade points to Morgan Stanley expecting foreign inflows to drive the next leg of gains even as volatility stays elevated in the near term. Investors will watch for capital-return announcements from Samsung and SK Hynix and the iPhone 18 launch in September as the next events to move the market.
This article is for informational purposes only and does not constitute investment advice.
