Korean stocks fall to historically "cheap" levels with no buyers, JPMorgan warns: Leverage-driven sell-off may continue

The valuation of the Korean stock market has fallen to a historic extreme, but buyers have yet to emerge. KOSPI suffered its third drop of more than 15% in five days this year, with its forward P/E ratio compressed to historical lows, though there is no apparent fundamental deterioration—a rare divergence that has attracted significant market attention.

J.P. Morgan points out that both valuation and technical factors are now sending strong buy-the-dip signals for Korean stocks, yet marginal buyers are vanishing at an accelerated pace.

Stock buyback programs by Samsung and SK Hynix have concluded, foreign capital continues to flow out, domestic institutional demand remains weak, and the market has lost its most critical source of buying support at the moment it is needed most.

Meanwhile, leverage ETF holdings remain elevated despite substantial sell-offs, fueling persistent mechanical selling pressure. J.P. Morgan warns that until this unresolved leverage risk is fully unwound, the possibility of a fresh wave of sell-offs cannot be ruled out.

Valuations Hit Historic Extremes, But 'Cheap' Doesn't Mean the Bottom

KOSPI’s current forward P/E has dropped to the lowest level on record. Even excluding the effects of memory giants such as Samsung Electronics and SK Hynix, the overall KOSPI trades at just 8.4x forward earnings, positioning it in the 11th percentile historically.

At the same time, the Relative Strength Index (RSI) has fallen to its lowest level since "equalization tariff," with the number of oversold stocks reaching extreme territory.

KOSPI is now trading near a long-term major trendline and is significantly below its 200-day moving average. The technical picture is deeply oversold, but as seasoned investors know, oversold conditions can persist far longer than expected.

The combination of attractive valuations and technicals looks increasingly appealing, but the key issue remains: cheap does not automatically mean the selling has stopped.

Three Main Buying Sources Retreat in Unison, Support System Fractures

The collapse of the support system is one of the most noteworthy structural shifts during this round of declines in Korean stocks.

Since the end of last August, corporate buybacks have been the main support for the market. However, Samsung has finished its buyback plan, SK Hynix is nearly concluded as well, and this key source of buying power is fading.

At the same time, foreign capital continues to record net outflows, and domestic institutional demand remains limited. As global AI sentiment cools, the market has lost its most important “catcher of the falling knife.” The simultaneous retreat of these three forces has left the KOSPI in a buying vacuum at a technically fragile moment.

Trend-Following Strategies Flip from Overweight to Net Short, Long-Term Investors Stand Aside

Positioning reversals are equally dramatic. Trend-following investors have shifted from extremely long positions to net short after this sharp sell-off.

From a tactical perspective, this turn might be positive—an extreme oversold condition, combined with short covering, offers potential momentum for a short-term rebound.

But the overall liquidity picture remains fragile: long-only investors seem to be waiting for volatility to stabilize and have yet to re-enter the market. Without substantive volatility compression, a system-wide bid is unlikely to materialize.

Leverage ETF Holdings Remain High, Mechanical Selling Has Not Cleared

This may be the most concerning aspect of the current market structure. Despite large-scale liquidations, leverage ETF holdings remain stubbornly elevated.

J.P. Morgan notes that the scale of capital outflow has been surprisingly limited, and the remaining leveraged positions continue to fuel mechanical selling during sharp declines.

The market has already undergone significant position cleansing, but leverage positions have not been fully digested. This lingering risk exposure means that unless leverage shrinks substantially, further rounds of selling cannot be ruled out.

This is also one of the key reasons why the current attractiveness in valuation and technicals has yet to translate into actual buying demand.

Stock Prices Fall as Earnings Forecasts Are Raised, Divergence Suggests Liquidity-Driven Decline Not Fundamental Collapse

Perhaps the most intriguing signal comes from the divergence between prices and fundamentals. Samsung and SK Hynix’s share prices have been hit hard, yet both companies’ forward earnings estimates have been revised up during the October correction.

This divergence is not confined to the memory sector. Earnings forecasts for industrial, financial, and healthcare sectors also remain on an upward trajectory, although their prices have seen less impact.

From this perspective, the current repricing of Korean stocks is driven more by capital flows and risk appetite, rather than a broad-based fundamental deterioration. This implies that if the selling pressure eases, the rebound could be significant. The core question remains: when will buyers return?

KOSPI and Philadelphia Semiconductor Index Divergence Grows, Global AI Sentiment Risk Persists

An important signal to monitor closely is the widening divergence in performance between the Philadelphia Semiconductor Index (SOX) and KOSPI.

The US semiconductor sector has shown early signs of stabilization, while Korean stocks remain under pressure. This divergence is unlikely to last for long and will eventually converge or resonate.

Should KOSPI fail to hold its current critical support levels, the rebound momentum in US semiconductor stocks may soon encounter obstacles. As one of the world’s most important barometers for the AI supply chain, the Korean equity market may be warning of deeper risks—implications that reach far beyond Korea itself.