South Korean and Japanese stock markets opened lower on Monday morning and continued to decline. As of writing, the Nikkei 225 index fell over 2%, while South Korea's KOSPI index once dropped more than 5%, with shares of the nation's "memory chip duo," Samsung Electronics and SK Hynix, both falling around 9%.
The volatility in the South Korean market remains a global focus, with Monday's sharp decline attributed to a sell-off in heavyweight chipmakers after their record-breaking gains on Friday, as investors reduced leveraged positions. On Friday, Samsung's stock surged 27% and SK Hynix jumped 30%, both hitting single-day records; the benchmark KOSPI index also recorded a record single-day gain of 18%, driven by foreign buying, which was widely seen as short covering.
Bloomberg analysis suggests that global investors who made record purchases of KOSPI stocks on Friday triggered a sell-off on Monday, offloading over 1 trillion won (approximately $698 million) worth of index constituents in early trading. According to South Korean media reports, the KOSDAQ index surged sharply, triggering a buy-side "sidecar" mechanism (a temporary halt in program trading). Data from the Korea Exchange showed that around 10:28 a.m. local time (9:28 a.m. Beijing time), due to significant volatility in the KOSDAQ 150 index futures and the KOSDAQ 150 index itself, the validity of buy orders in program trading was temporarily suspended for five minutes. When the sidecar was triggered, the KOSDAQ 150 index futures were up 75.80 points, or 6.41%, from the previous session, while the KOSDAQ 150 index had risen 38.12 points, or 3.13%. By the time the sidecar was lifted at 10:37 a.m. local time, the KOSDAQ index stood at 743.92, up 3.36% (24.16 points). In contrast, the benchmark KOSPI index continued its sharp decline, falling 5.03% or 331.51 points, to 6,263.94.
Homin Lee, a senior macro strategist at Lombard Odier Singapore, commented, "This is likely profit-taking following Friday's stunning rally. Some external headwinds are prompting investors to lock in profits and reduce leverage. The strengthening of the South Korean won and news related to China's progress in artificial intelligence and semiconductors may have also intensified the headwinds." The KOSPI index had already fallen more than 30% from its June high. As South Korea's stock market has long been viewed as a key indicator of Asian AI demand, the rapid exodus of traders from related assets has exacerbated the market correction.
Morgan Stanley: South Korean Stocks Have 36% Upside After 'Deleveraging'
Amidst the market turmoil, Morgan Stanley upgraded its rating on South Korean stocks from "equal-weight" to "overweight." The investment bank's strategists stated that the recent "leverage clearing" in the market actually presents a better opportunity for investors to reposition for themes related to the AI supply chain and the industrial super cycle. Led by Daniel K. Blake, the Morgan Stanley strategy team stated in a report that after the exit of crowded trades and leveraged capital, the KOSPI index still has a 36% upside potential to their target of 9,000 points. Morgan Stanley believes the recent market decline is "primarily technical" and that "we are past the midpoint of the clearing of leveraged ETFs, hedge fund leverage, and retail margin trading." The bank estimates the KOSPI index's short-term trading range could be between 5,500 and 10,500 points, and expects Samsung Electronics and SK Hynix to continue providing valuation support. Morgan Stanley is also bullish on South Korea's industrial, defense, and financial sectors, believing these stocks could benefit from related growth themes.
Beyond South Korea, Morgan Stanley also adjusted its ratings for other Asian markets. The bank upgraded its rating on the Thai stock market from "equal-weight" to "overweight," citing analysts' views on more opportunities for Thailand to attract foreign direct investment and enhance its economic competitiveness. Morgan Stanley noted that Thai corporate earnings are improving, valuations are low, and some core stocks could benefit from themes related to AI capital expenditure and energy security. Concurrently, Morgan Stanley downgraded its rating on the Australian stock market from "equal-weight" to "underweight." The bank believes that after multiple interest rate hikes and tax reforms that have weakened property investment incentives, the Australian stock market has limited upside potential going forward. Previously, Morgan Stanley had favored the Australian market due to its energy exposure amid the Iran conflict.
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