Foreign capital flees, retail investors buy in frenzy! JPMorgan explains the capital battle behind the turmoil in the South Korean stock market

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The South Korean stock market is experiencing a rare structural split in capital: foreign investors are selling at a record pace, while retail investors are stepping in with funds of a similar magnitude. The interplay of these two forces, against the backdrop of a fundamental upswing driven by the AI boom, together shape the unique ecosystem of Asia’s most volatile market.

According to Chase the Wind Trading Desk, JPMorgan’s latest South Korea Equity Strategy report released on June 25 states, foreign investors have seen a net outflow of about $95 billion from South Korea’s stock market this year, likely to easily break the single market annual foreign outflow record in Asia. Meanwhile, retail investors (including local ETF purchases) have accumulated net purchases of about $80 billion this year, becoming the main support for the market.

JPMorgan maintains its bullish view on the South Korean stock market, raising the KOSPI’s base/optimistic/pessimistic 12-month scenario targets to 12,500/15,000/8,000 points, respectively, advising investors to add positions and maintain maximum exposure on any pullback.

This tug-of-war in capital flow will not reverse in the short term, but the core bullish logic for South Korea’s stock market still rests on fundamental improvement driven by AI, national wealth effects from corporate profit growth, and valuation recovery potential from corporate governance reforms. South Korea remains JPMorgan’s top preference in Asia.

Forced Foreign Selling: Scale Constraints Trigger Involuntary Sales

The outflow of foreign funds from South Korea is characterized as “non-discretionary” rather than active bearishness. The core reason is that the two major memory chip giants, Samsung Electronics and SK Hynix, have seen their market values surge, reaching the position limits of emerging market (EM) long-term funds. This scale constraint affects roughly 10% of foreign holdings in both stocks, forcing fund managers to continuously reduce holdings as prices rise.

Data shows over 90% of year-to-date foreign outflows are from these two memory stocks. This structural feature means that as long as memory stocks continue to outperform the regional benchmark, the EM fund base constraint remains, and foreign outflow pressure will persist.

Notably, despite continuous net selling by foreigners, their proportional holdings in Korean stocks have actually increased noticeably since the start of the year—the reason being price appreciation has far outpaced the volume sold. Currently, the two major memory stocks make up more than two-thirds of foreign holdings in Korea. In contrast, global funds (non-EM dedicated) have significantly underweighted Korea; large real-money accounts indicate insufficient Korea exposure and a need to add positions in client research.

Leverage ETF Expansion: Structurally Elevated Volatility

The abnormal spike in Korea’s market volatility is closely connected to the explosive growth of leveraged ETFs at home and abroad. The AUM of leveraged ETFs with Korean assets as underlying has grown to $50 billion, the bulk of which comes from the market’s own rally.

These ETFs mainly achieve exposure through stock index futures and partly through spot and options, driving a sharp climb in open interest for single-stock futures. At the same time, ETFs’ demand for “crash protection” has pushed up implied volatility—the ratio of VKOSPI to VIX is now nearly 5x, while the historical average is about 1x. The gamma imbalance associated with leveraged ETFs has now exceeded $1 billion, significantly amplifying two-way market volatility.

Furthermore, Korea’s exchange and clearing house have raised capital requirements in response to higher trading volumes, causing financing costs for large-cap stocks to rise. Some brokers also struggle to manage concentrated exposure. Given the widespread use of such instruments domestically and internationally, the scale of leverage ETFs will not materially shrink in the short term, and high volatility will remain a structural norm for the Korean market.

Retail Investors Step In: Room Remains, Leverage Risk Controllable

With foreign funds continuing to exit and institutional investors (pension funds) selling on rallies for rebalancing, retail investors are now the primary buyers in Korea’s stock market. Data shows that including NXT platform trades and ETF purchases, retail net buy this year has reached about $80 billion.

The retail buying momentum still has room to continue, for three reasons: first, leverage levels in margin balances and options trading have risen but remain low relative to overall market cap and customer deposits; second, Korean retail investors are just beginning to repatriate overseas stock holdings back to the domestic market, with ample room for further inflow; third, as income rises and stock wealth effects continue to ferment, resident willingness to invest in stocks is expected to further increase—especially as real estate investing faces restrictions.

However, retail’s share of overall trading has dropped from its 65% average over the past two months, while pension participation has increased, though pensions still remain net sellers to maintain target portfolio weights.

AI Narrative Disruptions: Cyclical Swings Don’t Alter Uptrend

Korea’s market fundamentals are tightly bound to the AI cycle, and the AI cycle is still on a strong upward path. Analysts maintain their constructive view that the memory cycle will “stay high longer” and believe Korea tech stock earnings are more resilient versus global peers.

However, inevitable periodic disruptions to the AI narrative occur. JPMorgan lists five recent market volatility drivers: first, signs at the user level of optimization to reduce token consumption, sparking concerns on token pricing; second, China’s Zhipu AI GLM 5.2 has won positive market response, reigniting competition worries; third, uncertainty brought by new export control policies; fourth, ongoing supply pressure in stocks and bonds; fifth, the reopening of the Strait of Hormuz may ease related market and sector pressures.

As long as the growth rate of hyperscale cloud capital expenditure remains above the growth rate for semiconductor equipment capex, the supply-demand imbalance will persist, supporting memory chipmakers’ profit margins.

Korean memory chip companies’ AI income is now large enough to have a tangible impact at the macro level. Estimates suggest that in the next three years, the two major memory firms’ direct tax payments (including corporate income tax) to the government could easily exceed $350 billion; including personal income tax from employee bonuses, the amount is even greater.

For comparison, South Korea’s total foreign exchange reserves are currently about $427 billion, and government debt totals about $1 trillion. This wealth effect will provide the government ample resources for long-term physical and financial investment, infrastructure construction, and strategic planning for the AI era.

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The above excellent content is from Chase the Wind Trading Desk.

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