Nomura believes the current deleveraging process is a market "reset" rather than a reversal of the trend. South Korean stocks are transitioning from a "leverage-driven rally" to a "buyback-driven rally."

Corporate buybacks are projected to reach a record 116 trillion won in 2026 (with 90% coming from the two major semiconductor giants). Combined with the AI earnings cycle and government governance reforms, this will be the core engine for South Korean stocks to recover lost ground and aim for the 10,000-point target.

The South Korean stock market has just endured a brutal liquidity and leverage "run." According to Nomura, the KOSPI index's plunge from a peak of 9,115 points on June 22 to 6,691 points on July 24 was not due to a deterioration in fundamentals. Instead, it was triggered by mechanical selling from foreign investors (amounting to a massive 158 trillion won / 108 billion USD in outflows this year) and the "forced liquidation" of retail investors' single-stock leveraged ETFs.

However, Nomura argues that this "deleveraging" process is essentially a "reset," not a reversal of the trend. As market deleveraging nears its end, the logic for the next valuation re-rating in South Korean stocks will fundamentally shift. It will move from an early-stage "liquidity and leverage-driven" phase to a "fundamentals and corporate buyback-driven" phase. The firm forecasts that South Korean corporate buybacks in 2026 will reach a record 116 trillion won (with 90% coming from the two major semiconductor giants).

Nomura believes this is a critical window for the transition from a "leverage rally" to a "buyback rally." The opportunity for a fundamentals-driven re-rating is building. Supported by the AI earnings cycle, the KOSPI target of 10,000-11,000 points remains solid. Key catalysts to watch are the upcoming "low PBR company list" expected in November and the second-half tax reform policies, which will be the most direct drivers for South Korean stocks to "recover lost ground."

The Truth Behind the Plunge: A Triple Liquidity Shock, Not a Fundamental 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) even hit an all-time high of 96.9 on June 29. Nomura clearly states that this adjustment was driven by liquidity and structural factors, not a deterioration in corporate fundamentals. The three main sources of pressure were:

First, mechanical selling by foreign institutions. Net foreign selling of KOSPI shares has reached 15.8 trillion won (approximately 108 billion USD) year-to-date. The reason is that as the KOSPI rose sharply, South Korea's weighting in global benchmark indices like the MSCI exceeded the portfolio holding limits of institutional investors, triggering forced position reductions. This mechanical selling accelerated when the KOSPI hit 7,500 points (mid-May) and 9,000 points (late June).

Second, the amplifying effect of leveraged ETFs. Since the first leveraged ETF was listed on the KOSPI in 2010, their number has expanded to 56 (as of 2026). The total size of the South 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, leveraged ETFs have accumulated a loss of 53% (compared to the KOSPI's drop of only 22% over the same period), far exceeding twice the index's decline. Single-stock leveraged ETFs, all of which are based on the two major semiconductor stocks, have a total size of 1.1 trillion won, accounting for about 40% of all leveraged ETF assets.

Third, the National Pension Service (NPS) allocation cap. The NPS continuously increased its domestic stock allocation from 14.9% to 20.8%, but this is now approaching the effective upper limit of its total fund allocation, significantly weakening the support from institutional incremental funds.

The "Toxicity" of Leveraged ETFs: Retail Forced Liquidations and Government Intervention

The inherent risks of leveraged ETFs were fully exposed during this adjustment. Nomura points to two core mechanisms: first, volatility decay from daily rebalancing, which continuously erodes returns in a choppy market; second, the flow characteristics of chasing rallies and selling into declines, where funds that poured in during peaks suffer the largest losses during downturns.

Data shows that the 2x leveraged ETF for the KOSPI 200 has seen a net asset value decline of 52.6% since June 22, while the KOSPI 200 index itself fell only 23.8% over the same period. The scale of retail investors' forced liquidations relative to their margin balances has surged sharply, triggering a regulatory alarm. On July 16, the South Korean government announced the first round of control measures: suspending the listing and advertising of new single-stock leveraged ETFs; tightening liquidity providers' management of ETF premiums/discounts; raising the minimum cash margin requirement for single-stock leveraged ETFs from 10 million won to 30 million won; increasing the minimum trading unit from 1 share to 20 shares; and applying the same rules to domestic and foreign single-stock leveraged ETFs. Nomura expects even stricter regulatory measures to follow the July 16 announcement.

Deleveraging in Progress: Market "Reset" Signals Are Emerging

Nomura believes the current deleveraging process is a necessary prerequisite for the market to transition from a "liquidity-driven" to a "fundamentals-driven" phase. The following signals are worth close monitoring: foreign selling has slowed significantly, with net selling of only 9.8 trillion won so far in July, compared to 48.4 trillion and 44.5 trillion won in May and June respectively; the K-VIX remains elevated, currently around 90, and needs to stabilize and decline to confirm a fundamentals-driven rebound; the size of leveraged ETFs is shrinking, with AUM falling from its peak since June 22, reducing the "ammunition" that amplifies KOSPI volatility; and retail investors' willingness to buy the dip is waning, with their behavior in July becoming significantly more cautious.

New Rescue Engine: A "Buyback Frenzy" Led by Semiconductor Giants

As the market "deleveraging" process advances and the pressure from foreign selling eases, the next structural upward driver for South Korean stocks will be corporate share buybacks and the cancellation of treasury shares, especially among large-cap stocks. Nomura provides strikingly powerful data forecasts: the scale of buybacks in the South Korean stock market in 2026, 2027, and 2028 will reach 116 trillion won, 274 trillion won, and 328 trillion won, respectively. About 90% of these buyback funds will come from the two large semiconductor companies, used for employee bonuses and shareholder returns. For example, Samsung Electronics has a shareholder return budget for 2024-2026 equal to 50% of the cumulative free cash flow over three years, with the remainder after cash dividends used for share buybacks. Compared to historical data, the 2026 KOSPI buyback size of 11.6 trillion won will represent 2.2% of the market capitalization, far higher than the historical range of 0.2%-0.9% from 2018 to 2025. This will create a sustained and predictable market demand. Nomura believes that this scale of real capital injection will become a new source of structural demand, directly driving the KOSPI index towards its target of 10,000-11,000 points.

Maintaining KOSPI Target of 10,000-11,000 Points: Four Catalysts for Support

Nomura maintains its 2026 KOSPI target range of 10,000-11,000 points, corresponding to a 2026 expected P/E ratio of 10.5-11.5 times, a P/B ratio of 2.5-2.8 times, and an ROE of 27%. The KOSPI currently trades at 2026/2027 expected P/E ratios of 7.0 times/5.2 times and P/B ratios of 1.7 times/1.3 times, representing a significant valuation discount. The four core catalysts are: an AI-driven earnings super-cycle, with AI-related earnings in memory/HBM, power equipment, energy storage systems (ESS), and nuclear energy expected to support ROE over the next five years; Nomura forecasts KOSPI net profit growth of 253%/35% year-on-year for 2026/2027, with ROE of 27%/29%; improved capital efficiency and higher shareholder returns, as listed companies shift towards better capital efficiency, higher shareholder returns, and optimal leverage ratios, supporting higher P/E and P/B ratios; active shareholder activism and stewardship activities from institutional investors with proactive stewardship and engagement; and government regulation driving corporate governance upgrades, with mandates for 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 policies to be implemented in the second half of 2026. The low PBR company list, expected to be published in November, is seen as the most direct stock-specific catalyst, prompting related companies to cancel treasury shares, increase dividends, and dispose of non-core assets. Additionally, tightening the rules against dual listings and reforming the KOSDAQ market will improve shareholder protection and narrow the parent company discount.