How can Korean stocks "recover lost ground"? From "leveraged bull" to "buyback bull"

How can Korean stocks "recover lost ground"? From "leveraged bull" to "buyback bull"

The Korean stock market has just undergone a brutal "run" on liquidity and leverage.

According to Windchaser Trading Desk, Nomura Securities stated in its July 28 report that the sharp plunge in the Korean KOSPI index—from its interim peak of 9115 points on June 22, 2026 to 6691 points on July 24—was not rooted in a deterioration of fundamentals, but rather triggered by mechanical sell-offs by foreign capital (a total of 158 trillion won / $108 billion sold year-to-date) along with “blow-ups” in single-stock leveraged ETFs held by retail investors.

However, Nomura sees this "deleveraging" essentially as a "reset," not a trend reversal. As the market approaches the end of deleveraging, the fundamental logic of Korean stocks’ next round of valuation rerating will shift—from the previous “liquidity and leverage-driven” to “fundamentals and corporate buyback-driven.” The firm forecasts that Korean companies’ buybacks in 2026 will reach a record 116 trillion won (of which 90% will come from two semiconductor giants).

Nomura believes that this is the crucial window to switch from “leverage bull” to “buyback bull,” with opportunities for fundamental-driven rerating accumulating. Supported by the AI profit cycle, the KOSPI index target of 10,000-11,000 points remains robust; close attention should be paid to the upcoming “low PBR (price-to-book ratio) company list” in November and the tax reform policies in the second half of the year, which will be the most immediate catalysts for Korean stocks to “recover lost ground.”

Truth Behind the Plunge: Threefold Liquidity Shocks, Not Fundamental Deterioration

KOSPI plunged from 9115 points (June 22) to 6691 points (July 24) within just one month, a drop of 22%, while Korea’s Volatility Index (K-VIX) set a historic high of 96.9 on June 29. Nomura identifies the adjustment as driven by liquidity and structural factors, not by worsening corporate fundamentals.

Three main sources of pressure:

First, mechanical selling by foreign institutions. From the start of the year to now, foreigners have net sold KOSPI up to 15.8 trillion won (~$108 billion). The reason is, as KOSPI surged, Korea’s weighting in global indices (like MSCI) exceeded maximum holdings in institutional portfolios (e.g., a single stock surpasses 10% fund position limits), triggering forced reductions. This mechanical selling clearly accelerated when KOSPI hit 7500 points (mid-May) and 9000 points (end-June).

Second, the amplified effect of leveraged ETFs. Since the first leveraged ETF was listed on KOSPI in 2010, the number has expanded to 56 (2026). The total ETF market size in Korea is about 45 trillion won, of which leveraged ETFs account for 2.7 trillion won (roughly 6%). Retail investors hold about 85% of leveraged ETF positions. Since KOSPI peaked on June 22, leveraged ETFs accumulated losses of up to 53% (while KOSPI only fell 22%), over twice the index's drop. Single-stock leveraged ETFs (all tracking two semiconductor giants) reach 1.1 trillion won, about 40% of total leveraged ETF size.

Third, National Pension Fund allocation reaching ceilings. Korea’s National Pension Service (NPS) has been raising its proportion of domestic equities from 14.9% to 20.8%, but it is now near the effective upper bound of the fund allocation, weakening the institutional incremental capital inflow.

The “Toxicity” of Leveraged ETFs: Retail Blow-ups & Government Intervention

The inherent risks of leveraged ETFs have been fully exposed in this round of adjustment. Nomura points out two core mechanisms: first, volatility decay caused by daily rebalancing (continuously eroding returns in choppy markets); second, the nature of fund flows to chase highs and cut losses (money rushing in at the peak suffers the greatest losses on the way down).

Data-wise, 2x KOSPI 200 leveraged ETFs have dropped 52.6% in net value since June 22, while KOSPI 200 index fell just 23.8%. Forced liquidation by retail investors has soared relative to margin balances, triggering regulatory alarms.

The Korean government announced its first round of control measures on July 16:

  • Suspending new single-stock leveraged ETF listings and advertisements;
  • Tightening liquidity providers’ management of ETF premiums/discounts;
  • Raising minimum cash margin for single-stock leveraged ETFs from 10 million won to 30 million won;
  • Raising the minimum trading unit from 1 share to 20 shares;
  • Applying the same rules to domestic and foreign single-stock leveraged ETFs.

Nomura expects even stricter regulatory measures will be implemented after July 16.

Deleveraging Underway: Signs of Market “Reset” Emerging

Nomura believes that the current deleveraging process is a necessary prerequisite to shift from a liquidity-driven to a fundamentally-driven market. The following signals are worth close monitoring:

  • Foreign sell-off has slowed markedly: Net sell-out since early July is just 9.8 trillion won, compared to 48.4 trillion won in May and 44.5 trillion won in June—a significant reduction;
  • K-VIX remains high: Currently near 90; wait for it to stabilize and fall to confirm a fundamentals-driven rebound;
  • Leveraged ETF size is shrinking: Since June 22, the AUM of leveraged ETFs has retreated from its peak, reducing the "ammo" amplifying KOSPI swings;
  • Retail “bottom-fishing” has cooled: In July, retail and ETF dip-buying turned notably more conservative.

New Engine for Market Rescue: Semiconductor Giants Lead “Buyback Frenzy”

As deleveraging proceeds and foreign selling pressure eases, the next structural driver for Korean stocks will be corporate buybacks and treasury stock cancellations, especially among large-cap stocks.

Nomura provides striking forecasts: Korean stock buybacks will reach 116 trillion won, 274 trillion won, and 328 trillion won in 2026, 2027, and 2028, respectively.

Of this, about 90% of buyback funds will come from two large semiconductor companies (used for employee bonuses and shareholder returns). For example, Samsung Electronics budgeted shareholder returns for 2024-2026 at 50% of three-year total free cash flow, with the remainder after cash dividends used for stock buybacks.

Compared with history, KOSPI’s 2026 buyback amount (11.6 trillion won) will account for 2.2% of market capitalization, far above the historical range of 0.2%–0.9% for 2018–2025, forming a continuous and predictable market demand.

Nomura believes such large-scale cash investment will become a new structural demand source for the market, directly propelling the KOSPI index towards the target of 10,000–11,000 points.

Maintaining 10,000–11,000 KOSPI Target: Four Major Catalysts

Nomura maintains the 2026 KOSPI target range of 10,000–11,000 points, corresponding to expected 2026 P/E of 10.5–11.5x, P/B of 2.5–2.8x, ROE of 27%. Current KOSPI trades at 2026/2027 forecast P/E of 7.0x/5.2x, P/B of 1.7x/1.3x, with significant valuation discounts.

Four core catalysts:

  1. AI-driven earnings super-cycle: AI-related profits in memory/HBM, electrical equipment, energy storage (ESS), and nuclear will support ROE over the next five years. Nomura forecasts KOSPI net profit growth of 253%/35% for 2026/2027, ROE of 27%/29%.
  2. Improved capital efficiency and enhanced shareholder returns: Listed companies shift towards better capital efficiency, higher shareholder returns, and optimal leverage, supporting higher P/E and P/B.
  3. Active shareholderism and activist investing: Institutional investors increasingly exercise stewardship and activism.
  4. Government regulation driving corporate governance upgrades: Mandatory disclosure of target ROE, disposal of non-core assets, stricter listing requirements, and governance reforms.

Nomura expects a series of significant policies to land in the second half of 2026, with the low-PBR company list scheduled for November seen as the most direct stock catalyst—driving relevant companies to cancel treasury shares, raise dividends, and dispose of non-core assets. Further tightening of duplicate listing rules and KOSDAQ reform will enhance shareholder protection and reduce parent company discounts.

 

~~~~~~~~~~~~~~~~~~~~~~~~

The above exciting content comes from Windchaser Trading Desk.

For more detailed interpretation, including real-time analysis and frontline research, please join 【Windchaser Trading Desk▪Annual Membership】

Risk Notice and DisclaimerThe market involves risks; investing requires caution. This article does not constitute personal investment advice nor takes into account individual users’ specific investment goals, financial status, or needs. Users should consider whether the opinions, views, or conclusions in this article suit their particular situation. Investment based on this is at your own risk.