Morgan Stanley Sees 36% Upside for Korean Stocks After Washout

Morgan Stanley upgraded South Korean stocks to overweight, saying the recent "leverage washout" gives investors a better entry point into the AI trade and the industrial super-cycle theme.

Strategists led by Daniel K Blake said the Kospi index offers 36% upside to their 9,000 target, after the sharp unwinding of crowding and leverage. The country had been rated equalweight.

The selloff was "mainly technical," the analysts wrote. They said they are past the midpoint of unwinding leveraged ETFs and retail margin.

Kospi has fallen about 30% from a June peak. Traders fled the market that became Asia's bellwether for AI demand. The rout was worsened by the surge in single-stock leveraged ETFs and concentrated index weightings.

South Korean regulators have since stepped in to curb those instruments. The government plans to limit retail involvement in leveraged products, including by capping exposure at a set portion of investors' total portfolios.

Morgan Stanley sees Kospi in a near-term range of 5,500 to 10,500. The analysts said Samsung Electronics and SK Hynix provide valuation support. They also predicted tailwinds for stocks in industrials and defence.

The bank also upgraded Thai equities to overweight from equalweight. The analysts cited rising foreign direct investment and competitiveness. Earnings are inflecting, valuations are cheap, and key stocks benefit from AI capex and energy security themes.

Morgan Stanley cut Australia to underweight from equalweight. The bank said the market offers limited upside after several interest rate hikes and tax reforms that slashed incentives for property investment. It had previously seen upside in Australia due to its energy exposure amid the Iran war.