South Korean stock market poised for a bottoming-out battle: foreign selling slows, won strengthens, KOSPI 200 valuation falls to 1st percentile in 10 years.

After experiencing extreme deleveraging and concentrated selling by foreign investors, the South Korean stock market is reaching a dual inflection point in terms of valuation and technical indicators. The KOSPI 200 valuation has been reset to the first percentile of its ten-year history, and the market narrative is beginning to shift from a "crisis mode" of one-sided selling to a "bottoming out and rebounding" scenario.

On September 8, the Korea Composite Stock Price Index (KOSPI) broke through the short-term downtrend line and closed above the 50-day moving average for the first time since the recent sharp sell-off.

Marginal improvements in liquidity and exchange rates are supporting the rebound. The pace of unilateral selling by foreign investors is slowing, and the Korean won is strengthening in tandem, with the positive dynamic of "rising spot prices and increased volatility" beginning to return.

Historically, a stronger Korean won has helped attract foreign investment back to the country. If the exchange rate continues to stabilize, the decline in foreign demand could become the next positive factor for the Korea Composite Stock Price Index (KOSPI).

Micro-level trading sentiment has also improved. The KOSPI Volatility Index (VIX) recorded its first meaningful rise since the current sell-off began. Bank of America points out that if investors resume chasing upside call options, it could easily reignite the upward momentum of "spot and volatility resonance".

This marginal change suggests that the extreme sell-off driven by concerns about AI capital expenditure and risk aversion may be nearing its end. With valuation safety margins becoming apparent, investors need to reassess the bottom support in the South Korean market and gamble on the sustainability of the rebound amidst the interplay of the semiconductor cycle and geopolitical risks.

Leverage clearing and valuation reset to historical extremes

The core of this round of adjustments lies in the de-leveraging following the expansion of leverage and the deflation of valuation bubbles. Individual investors' credit trading and leveraged products were previously highly active, and the contraction of leverage has turned the valuation adjustment into a continuous and concentrated sell-off.

Bank of America’s Bubble Risk Indicator (BRI) shows that the KOSPI bubble risk has plummeted from the bubble zone to 0.52, while volatility has also halved.

As the bubble bursts, South Korean stock market valuations have reset to extreme levels. The KOSPI 200's forward P/E ratio is only 6.2, placing it at the 1st percentile of its own ten-year history; in contrast, global peers are generally valued at the 68th percentile. This extreme discount provides the market with substantial downside protection.

Bank of America believes that, against the backdrop of volatility normalization and valuation cleansing, the risk-reward ratio of selectively increasing upside exposure to the South Korean stock market is attractive, and suggests participating in the upside through 3-month call option spreads.

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