South Korea’s stock market has been one of the top performers this year, but it has dropped sharply in recent weeks. Still, J.P. Morgan believes the worst may now be behind us.
The Kospi Composite index has fallen almost 40% since late June. J.P. Morgan said in a research note on Wednesday that the index now looks appealing because of strong earnings growth and low valuations.
The market started with a normal pullback, but the decline became steeper as exchange-traded funds and hedge funds sold assets to reduce debt, a process called deleveraging. J.P. Morgan said most leveraged ETFs have now finished this process, and hedge funds are about 90% done. This suggests South Korean stocks may be close to bottoming out.
The firm warned that the upcoming Federal Reserve decision and Big Tech earnings could make investors cautious in the short term. However, they said that overall, Korea’s market setup looks appealing, thanks to low valuations and strong earnings momentum.
Even after the recent drop, the Kospi is still up 34% this year. Samsung Electronics and SK Hynix, both memory chipmakers, have led the index’s gains as demand for AI-related products has surged.
Both stocks have dropped sharply since late June. Losses increased on Wednesday after SK Hynix’s second-quarter earnings fell short of expectations, raising concerns among investors that profit margins may have peaked in this cyclical industry.
J.P. Morgan also highlighted South Korea’s consumer, biotech, pharmaceutical, and banking sectors as good options for investors who want to diversify beyond memory chip stocks.
