South Korea's stock market has just endured a brutal liquidity and leverage "squeeze."

According to market sources, a July 28 report from Nomura indicated that the KOSPI's drop from its June 22, 2026, peak of 9,115 points to 6,691 points on July 24 was not caused by a fundamental deterioration. Instead, it was triggered by a combination of mechanical selling from foreign investors (with net selling reaching 158 trillion won, or $108 billion, year-to-date) and the "margin calls" on single-stock leveraged ETFs held by retail investors.

However, Nomura believes this deleveraging process is essentially a "reset," not a trend reversal. As the market's deleveraging nears its end, the logic for the next re-rating of KOSPI will fundamentally shift—from an earlier phase driven by "liquidity and leverage" to one driven by "fundamentals and corporate buybacks." The firm forecasts that total Korean corporate buybacks in 2026 will reach a record 116 trillion won, with 90% coming from the country's two major semiconductor giants.

Nomura believes the current period is a critical window for transitioning from a "leverage-driven rally" to a "buyback-driven rally," with fundamental-driven re-rating opportunities accumulating. Supported by the AI earnings cycle, the KOSPI target range of 10,000 to 11,000 points remains solid. It is closely watching the "low PBR company list" expected in November and tax reform policies in the second half of the year, which are seen as the most direct catalysts for the market to "reclaim its lost ground."

The Truth Behind the Plunge: A Triple Liquidity Shock, Not a Fundamentals Deterioration

In just one month, the KOSPI fell from 9,115 points (June 22) to 6,691 points (July 24), a decline of 22%. The Korea Volatility Index (K-VIX) hit an all-time high of 96.9 on June 29. Nomura clearly states that this correction was driven by liquidity and structural factors, not a worsening of corporate fundamentals.

The three main sources of pressure were:

First, mechanical selling by foreign institutions. Year-to-date, foreign investors have net sold 15.8 trillion won ($108 billion) in KOSPI shares. The reason is that after the KOSPI's significant rally, Korea's weight in global benchmark indices like MSCI exceeded the holding limits of institutional portfolios (e.g., a single stock exceeding 10% of a fund's position), triggering forced reductions. This mechanical selling accelerated notably when the KOSPI hit 7,500 points (mid-May) and 9,000 points (end of June).

Second, the amplifying effect of leveraged ETFs. Since the first leveraged ETF was listed on the KOSPI in 2010, the number has expanded to 56 (as of 2026). The total size of the Korean ETF market is about 45 trillion won, with leveraged ETFs accounting for 2.7 trillion won (about 6%). Retail investors hold about 85% of leveraged ETF positions. Since the KOSPI peaked on June 22, cumulative losses on leveraged ETFs have reached 53% (compared to the KOSPI's 22% decline over the same period), far exceeding two times the index's decline. Single-stock leveraged ETFs (all targeting the two major semiconductor stocks) are worth 1.1 trillion won, accounting for roughly 40% of the total leveraged ETF market.

Third, the National Pension Service (NPS) reaching its allocation limit. The NPS has been steadily increasing its domestic equity allocation from 14.9% to 20.8%, but this is now approaching the practical upper limit of its overall capital allocation, significantly weakening the support from institutional incremental funds.

The "Toxicity" of Leveraged ETFs: Retail Margin Calls and Government Intervention

The inherent risks of leveraged ETFs were fully exposed during this correction. Nomura points to two core mechanisms: first, the volatility decay from daily rebalancing (which steadily erodes returns in choppy markets); and second, the fund flow characteristics of chasing gains and selling into losses (funds that poured in at the peak suffered the most during the decline).

In terms of data, the net asset value of the 2x leveraged ETF tracking the KOSPI 200 has fallen by 52.6% since June 22, while the KOSPI 200 index itself fell only 23.8% over the same period. The scale of forced liquidation by retail investors has surged relative to margin balances, triggering regulatory alarms.

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

- Suspended the listing of new single-stock leveraged ETF products and related advertising.
- Tightened liquidity providers' management of ETF premiums/discounts.
- Raised the minimum cash margin requirement for single-stock leveraged ETFs from 10 million won to 30 million won.
- Increased the minimum trading unit from 1 share to 20 shares.
- Applied the same rules to domestic and foreign single-stock leveraged ETFs.

Nomura expects further, stricter regulatory measures to be announced beyond those on July 16.

Deleveraging in Progress: Signals of a Market "Reset" Emerging

Nomura believes the current deleveraging process is a necessary prerequisite for the market to shift from being "liquidity-driven" to "fundamentals-driven." The following signals are worth watching closely:

- Foreign selling has slowed significantly: Net selling since the beginning of July is only 9.8 trillion won, compared to 48.4 trillion won in May and 44.5 trillion won in June, a marked decrease.
- The K-VIX remains elevated: Currently around 90, it needs to stabilize and fall before a fundamentals-driven rebound can be confirmed.
- Leveraged ETF AUM is shrinking: Since June 22, the assets under management of leveraged ETFs have fallen from their peak, reducing the "ammunition" that amplifies KOSPI volatility.
- Retail buying appetite has cooled: The behavior of retail investors and ETFs buying on dips has become noticeably more conservative in July.

A New Engine for a Market Rescue: The "Buyback Frenzy" Led by Semiconductor Giants

As the market's deleveraging process advances and the pressure from foreign selling eases, the next structural driver for Korean stocks will be corporate share buybacks and the cancellation of treasury shares, particularly among large-cap stocks.

Nomura offered a striking data forecast: the scale of buybacks on the Korean stock market for 2026, 2027, and 2028 will reach 116 trillion won, 274 trillion won, and 328 trillion won, respectively.

About 90% of this buyback capital will come from the two major semiconductor companies (for employee bonuses and shareholder returns). For example, Samsung Electronics' shareholder return budget for 2024-2026 is 50% of its cumulative free cash flow over those three years, with the remainder after deducting cash dividends to be used for share buybacks.

Compared to historical data, the 2026 KOSPI buyback scale (11.6 trillion won) will represent 2.2% of market capitalization, far higher than the historical range of 0.2% to 0.9% from 2018-2025. This will create a sustained and predictable source of market demand.

Nomura believes that this level of tangible capital deployment will become a new structural source of demand for the market, directly driving the KOSPI index toward its target of 10,000 to 11,000 points.

Maintaining KOSPI Target of 10,000-11,000 Points: Supported by Four Catalysts

Nomura maintains its 2026 KOSPI target range of 10,000-11,000 points, corresponding to a 2026 estimated P/E of 10.5-11.5 times, a P/B of 2.5-2.8 times, and an ROE of 27%. Currently, the KOSPI trades at 7.0 times and 5.2 times its 2026 and 2027 estimated P/E, and 1.7 times and 1.3 times its P/B, representing a significant valuation discount.

The four core catalysts are:

- An AI-driven earnings super-cycle: AI-related earnings from memory/HBM, power equipment, energy storage systems (ESS), and nuclear energy are expected to support ROE for the next five years. Nomura forecasts KOSPI net profit growth of 253% and 35% year-on-year for 2026 and 2027, with ROEs of 27% and 29%, respectively.
- Improved capital efficiency and enhanced shareholder returns: The transition of listed companies toward better capital efficiency, higher shareholder returns, and optimal leverage ratios will support higher P/E and P/B multiples.
- Active shareholder campaigns and activist investing: Proactive stewardship and activism by institutional investors.
- Government regulatory push for corporate governance upgrades: Mandating better disclosure of target ROE, promoting the disposal of non-core assets, and tightening listing requirements and governance structures.

Nomura expects a series of important policy measures to be implemented in the second half of 2026. The low PBR company list, expected in November, is seen as the most direct stock-specific catalyst—it will drive the relevant companies to cancel treasury shares, increase dividends, and dispose of non-core assets. Additionally, the tightening of rules against dual listings and reforms to the KOSDAQ market are expected to improve shareholder protection and reduce the parent company discount.