Regarding the new regulations on leverage, valuation, and the latest trends of foreign investment, this is the latest perspective of Wall Street on the South Korean stock market.

Global semiconductor selloff and momentum reversal have pushed the South Korean stock market into historically undervalued territory. The KOSPI index has dropped nearly 25% since its peak on June 22, with an additional 8.8% decline this week alone, bringing the forward price-to-earnings ratio to the lowest level since 2004. Both Goldman Sachs and UBS pointed out in their latest reports that the current valuation presents a positive risk-reward ratio, but volatility is expected to continue in the near term. According to a report from Goldman Sachs on July 17, the 12-month forward price-to-earnings ratio of the KOSPI index had dropped to 5.78 times as of July 16, lower than the trough level during the 2008 global financial crisis and the lowest since 2004. Even assuming a profit downgrade of up to 41% - equivalent to the worst level during the financial crisis, and calculating based on the valuation multiple at the bottom of EPS in 2008, the KOSPI still presents a positive risk-reward ratio. UBS has maintained a target price of 9200 points for the KOSPI (corresponding to a 9 times next twelve months price-to-earnings ratio) and shifted its investment portfolio strategy to a barbell strategy. Foreign capital flows have shown a marginal shift. According to Goldman Sachs data, foreign investors turned net buyers of the KOSPI this week, with inflows mainly concentrated in the automotive and retail sectors, amounting to approximately 19 billion Korean won. The Korean won appreciated by 1.2% against the U.S. dollar this week and by 1.5% against the Japanese yen. However, Goldman Sachs' South Korea stock risk indicator currently reads -2.7, still deep in the risk-averse zone. Valuations breaking historical extremes, positive risk-reward ratio emerging The KOSPI fell 8.8% this week, with the technology, construction, and retail sectors leading the declines, while the chemicals, banking, and insurance sectors showed relative resilience. The MSCI Korea Index, in USD terms, fell by 10.2%. Goldman Sachs noted that the forward earnings of the KOSPI are highly correlated with the index performance, and the current decline in the index compared to earnings prospects is clearly excessive. The report cited stress test data showing that even assuming a 41% decline in earnings per share - equivalent to the worst level during the global financial crisis, and calculating based on the historical valuation multiple (13 times) at the bottom of EPS in 2008, the corresponding point for the KOSPI is about 8965 points, still much higher than the current level, indicating that the current price has a positively skewed risk-return feature. Looking at the cross-section of valuations, the 12-month forward price-to-book ratio of the KOSPI has fallen from its peak on June 22 to 1.43 times, while the forward return on equity (ROE) remains at around 25%. Goldman Sachs pointed out that ROE has always been a core variable driving the price-to-book ratio of the KOSPI, and the extent of the deviation between valuation and fundamentals is rare. UBS's report added that excluding Samsung Electronics and SK Hynix, the overall forward price-to-earnings ratio of the KOSPI is 8.79 times, still below historical averages, further confirming the overall undervaluation of the market. Implementation of new regulations on single stock leveraged ETFs, impact may be limited UBS detailed the series of regulatory measures taken by the South Korean government regarding single stock leveraged ETFs: the minimum cash margin requirement will be significantly increased from about 3 million Korean won to 30 million Korean won starting on August 5; from August 19, the use of alternative collateral will be prohibited; new product listings will be suspended, and marketing activities for existing products will be immediately banned; and the minimum trading unit will be increased from 1 unit to 20 units in November. UBS analysis believes that the suspension of new product listings and the requirement for a full cash margin of 30 million Korean won are the most substantial measures to curb speculative trading. Considering that 30 million Korean won is equivalent to about 7% of total assets of households at the third income percentile and around 27% of financial assets, this threshold will significantly restrict the participation space of retail investors. In comparison, extending the duration of investor education and increasing the minimum trading unit (20 units equivalent to 190 USD) is expected to have limited practical effects. It is worth noting that UBS pointed out that the market price adjustment has already partially completed a "deleveraging" process before the new regulations - the total size of single stock leveraged ETFs (including domestic and foreign listings) has decreased from a peak of approximately 2.4 trillion Korean won on June 25 to about 1.7 trillion Korean won currently. If investors have held since May 27 (the listing date of single stock leveraged ETFs in South Korea), they have already seen a loss of 30% to 32%; if held since June 25 (stock price peak), the loss could be as high as 44% to 55%. Overall reduction in leveraged ETF size, margin risks remain manageable Goldman Sachs data shows that due to recent market sell-offs, the total size of domestic leveraged ETFs has fallen back to levels before the introduction of single stock leveraged ETFs. Although the proportion of leveraged ETFs in the Korean ETF market continues to rise, as of July 16, their size as a percentage of total ETF assets under management remains at around 5%, with a relatively limited overall volume. In terms of margin risks, Goldman Sachs cited data showing that as of July 15, the margin call coverage ratio had risen to 3.8%, and brokerage receivables had increased to 15 trillion Korean won, both showing an upward trend. The balance of margin financing had dropped from its peak of 38 trillion Korean won to 33 trillion Korean won, but measured as a ratio adjusted for market value, the ratio remained stable at around 0.5%. At the same time, investors' deposit balance had increased to 110 trillion Korean won, leading to a significant decrease in the ratio of margin financing to deposit balance, indicating limited systemic risk from overall leverage exposure. Retail investor fund flows show some resilience. According to Goldman Sachs data, despite continued market volatility, retail investors' net inflows into traditional ETFs and leveraged ETFs have not stopped. Foreign investors turned net buyers, structural differentiation continues Goldman Sachs data shows that foreign investors recorded net purchases of approximately 19 billion Korean won on the KOSPI market this week, with significant inflows into the automotive (net purchases of 19.6 billion Korean won) and retail (net purchases of 11.8 billion Korean won) sectors, while the technology sector faced net sales of around 76.6 billion Korean won, indicating significant differentiation among foreign investors in different sectors. Institutional investors were net sellers of 119.1 billion Korean won this week, while retail investors were net buyers of 95.3 billion Korean won. Looking at cumulative foreign capital flows from the beginning of the year, foreign net sales of the KOSPI have amounted to approximately 16.1 trillion Korean won, indicating continued selling pressure. The UBS report warns that given uncertainties in AI demand prospects and potential earnings fluctuations for Samsung Electronics and SK Hynix, market volatility may remain high in the short term - and high volatility is expected to further compress the assets under management of leveraged ETFs. Strategic divergence: Goldman Sachs is bullish on valuation, UBS shifts to barbell strategy Facing continued volatility, the two institutions have different strategic orientations. Goldman Sachs maintains a 12-month target price of 12,000 points for the KOSPI, believing that the current valuation fully reflects pessimistic expectations, supporting a buy-on-dips approach. UBS, while maintaining a target price of 9,200 points, has shifted its portfolio strategy to a barbell structure to address uncertainties in AI demand and potential earnings volatility for Samsung Electronics and SK Hynix. The addition of Shinsegae (consumer), Celltrion (medical), and Samsung E&A (construction) represents defensive and value-oriented allocations, while the removal of targets is focused on sectors with significant previous gains in cyclical and growth sectors. UBS points out that the high turnover rate of individual stock leveraged ETFs - equivalent to 54% of SK Hynix turnover and 24% of Samsung Electronics turnover since July - suggests that the impact of ETF-related fund flows on underlying stocks may be greater than the apparent size observed in the data, and this structural disturbance is expected to gradually diminish after regulatory tightening but may still maintain high volatility in the short term.