Morgan Stanley Says Kospi Selloff Is a Breather, Not a Breakdown, Sees 10,500 in Bull Case

Morgan Stanley said the sharp selloff in South Korean stocks on June 23 was a temporary breather rather than a trend breakdown, and projected the Kospi could rise to 10,500 in a bull-market scenario.

In a report released June 23, Morgan Stanley said the Kospi fell 10% that day, led lower by semiconductor makers and artificial intelligence-related stocks. The bank attributed the drop to a mix of factors, including weakness in Micron and policy comments that it said were not supportive.

The report said the Kospi underperformed comparable markets including Japan's Topix, which fell 1.3%, and Taiwan's Taiex, down 2.6%, citing South Korea's heavy exposure to memory chips and the impact of policy-related news.

Morgan Stanley said the Korean market's steeper decline was driven mainly by fatigue after a prolonged rally.

Even so, the bank said fundamentals for memory-chip makers and adjacent AI names remain solid because those products continue to be a key bottleneck as supply struggles to keep up with surging AI demand.

Morgan Stanley said it does not view the latest correction as the start of a bear market. Instead, it described the pullback as a necessary pause while investors wait for clearer signals on policy direction and the AI investment story.

The market is now focused on stock moves following shareholder meetings at Micron and Nvidia, as well as second-quarter earnings from Korean chipmakers, according to the report. Morgan Stanley said it remains positive on semiconductor companies, related holding firms and adjacent technology stocks expected to benefit.

The bank set a base-case target of 9,000 for the Kospi. In a bull-case scenario, the index could reach 10,500, while a bear-case scenario would imply 6,500.

Morgan Stanley said market volatility is likely to remain elevated for now. The report said the market has entered a period of rising volatility, as broader product offerings and a wider investor base boost liquidity while also amplifying price swings.

It expects the Kospi to continue posting wide swings after the correction.

The bank also recommended a barbell strategy for portfolio construction. That approach allocates one side of a portfolio to high-growth, high-risk assets and the other to defensive stocks, while keeping a relatively smaller weighting in middle-ground names.

The report said investors should maintain exposure to growth stocks while broadening allocations to more defensive sectors such as financials, defense, healthcare and premium consumer goods.

Choi Su-jin, Hankyung.com reporter naive@hankyung.com