South Korean stocks gain Morgan Stanley overweight call

South Korean stocks won a Morgan Stanley upgrade after a forced selloff, with the bank saying Kospi risk now offers a cleaner AI entry point.

Morgan Stanley raised the country to overweight from equalweight, according to a note by strategists led by Daniel K Blake. The bank said Kospi offers 36% upside to its 9,000 target, after a violent unwind changed the risk-reward for investors seeking exposure to artificial intelligence and industrial demand.

Kospi leverage reset

The upgrade follows a stretch of extreme trading in South Korea’s benchmark index. The Kospi dropped as much as 5.5% on Monday after gaining a record 18% in the previous session, according to market figures cited alongside the note.

Morgan Stanley described the latest decline as “mainly technical” and said “we are past the midpoint of unwinding leveraged ETFs, hedge fund leverage, and retail margin.” That framing matters because it treats the selloff less as a rejection of Korea’s earnings story and more as a forced reduction in crowded positions.

The Kospi has fallen more than 30% from a June peak, according to the figures in the source material. The drop hit a market that had become one of Asia’s most visible equity proxies for AI demand, especially because memory chips and advanced electronics sit close to the center of the global technology supply chain.

Samsung and SK Hynix support

Morgan Stanley pointed to Samsung Electronics Co. and SK Hynix Inc. as sources of valuation support for the index. Both companies are central to Korea’s equity benchmark and to the investor debate over whether AI infrastructure spending can keep feeding demand for memory chips.

The bank also identified industrials, defence and financials as sectors that could benefit if the broader super-cycle thesis holds. That view ties Korea’s market case to more than semiconductors: factories, military spending and banks all become part of the argument if capital expenditure, national security budgets and domestic liquidity stay supportive.

The risk is that leverage has distorted both sides of the trade. Single-stock leveraged exchange-traded funds and concentrated index weightings helped intensify the rally, then deepened the retreat when traders cut exposure quickly.

Retail limits reshape risk

South Korean regulators have moved to curb the use of leveraged products, and the government plans to limit retail participation by capping exposure at a set share of investors’ portfolios. The policy response signals concern that amplified retail products can turn a sector-led rally into a market-stability issue.

If Morgan Stanley is right that the forced selling is already beyond its midpoint, the macro effect would be calmer transmission from AI optimism into Asian equity markets. For Korea, that would give Samsung Electronics Co., SK Hynix Inc. and other index heavyweights more room to trade on earnings expectations rather than margin pressure, while the wider ETF industry would face a slower but cleaner rebuilding of risk.

If deleveraging resumes instead, the pressure would travel through a different channel: lower equity wealth, tighter investor risk appetite and renewed caution toward AI-linked Asia trades. In that case, the bank’s 5,500–10,500 near-term Kospi range becomes the operative map, with chipmakers exposed to valuation compression and leveraged product providers facing heavier scrutiny.

A third path runs through regulation. If retail caps become binding, Korea’s market could become less prone to leveraged bursts, but trading volumes and speculative flows may also soften; that would affect the global AI trade by reducing one of its most active equity release valves, leave Korea’s largest technology names more dependent on institutional demand and force the ETF sector to redesign products around lower leverage.