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(Bloomberg) — Morgan Stanley upgraded South Korean stocks to overweight, saying the recent “leverage washout” offers investors a better entry point into the artificial intelligence trade and industrial super-cycle theme.
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After the sharp unwinding of crowding and leverage, Kospi offers 36% upside to Morgan Stanley’s target of 9,000, strategists led by Daniel K Blake said in a note. The country was previously rated equalweight by the broker.
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The recent selloff was “mainly technical” and “we are past the midpoint of unwinding leveraged ETFs, hedge fund leverage, and retail margin,” the analysts said.
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The Kospi index has tumbled about 30% from a peak in June, as traders rapidly sold out of the market that has become Asia’s bellwether for artificial intelligence demand. Exacerbating the rout was the nation’s surge in single-stock leveraged exchange-traded funds and concentrated index weightings.
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South Korean Regulators have since stepped in to curb the use of such instruments, with the government planning to limit retail involvement in leveraged products, including by capping exposure at a set portion of investors’ total portfolios.
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Morgan Stanley, which sees Kospi in a near-term range of 5,500-10,500, sees the Samsung Electronics Co. and SK Hynix Inc. providing valuation support. It also predicted tailwinds for stocks in sectors including industrials, defence, and financials.
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Morgan Stanley also upgraded Thai equities to overweight from equalweight as its analysts see more opportunities in the Southeast Asian nation as it lifts foreign direct investment and competitiveness. Earnings are inflecting and valuations are cheap, while key stocks are set to benefit from the AI capex and energy security themes, they added.
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Meantime, the bank cut its recommendation on Australia to underweight from equalweight, saying the market offered limited upside after several interest rate hikes and tax reforms that slashed incentives for property investment. It previously saw upside in Australia due to its energy exposure amid the Iran war.
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