Korea Equity Strategy: Update on the de-leveraging process in Korea

研报英文原文证据摘录

Korea Equity Strategy: Update on the de-leveraging process in Korea

vernment and structural governance improvements), meaning that the market

should be able to overcome positioning unwinds and persevere with the

positive trend. We remain OW Korea in our regional allocations and our 12m-

out base case KOSPI target remains 12,500.

• Extent of leverage “normalization”: Of all the leverage channels in Korea,

we see (1) futures & options largely an institutional market with limited signs

of speculative excess, and (2) retail leverage via margin and bank loans as

relatively modest (down a lot in KOSDAQ though). The issues around (3)

swap capacity (globally rising funding costs compounded by Korea-specific

capital constraints and concentration issues) and (4) volatility from

outstanding leveraged ETFs – both remain but have materially eased

(tactically, because the market is lower, and structurally, because the

underlying issues are being addressed). We estimate leveraged ETF unwind to

be 75% through (to an acceptable level of ~$18bn) and equity H/F de-

leveraging more than 50% through (assuming L/S ratios reach the upper end

of 2025’s range).

• Leveraged ETFs: Leveraged ETFs with Korea underlyings grew to $50bn in

AUM (mostly due to the growth of the market) by late June. Relative to its

market size, this was 4x larger than the US and led to very pronounced volatility

(and forced de-leveraging on down-days) - the VKOSPI to VIX ratio is sill

closer to 5x vs the usual 1x. Not only does this detract from vol-sensitive

inflows, but it makes vol-based risk-management harder for asset managers

and securities companies. Over Jun and July we have seen this excessive

volatility compound the modest AI jitters seen elsewhere in global AI hardware

stocks.