Morgan Stanley Upgrades South Korea Stocks to Overweight, Citing AI Re-Entry Opportunity

Morgan Stanley upgraded South Korean equities to overweight after the market's recent plunge, saying the selloff offers a chance to re-enter the artificial intelligence investment cycle.

Bloomberg reported on August 2 that Morgan Stanley raised its view on South Korean stocks to overweight from equalweight.

In a report, the bank's strategy team led by Daniel K. Blake wrote that recent leverage and crowding have been largely unwound. The team said the Kospi has about 36% upside to its 9,000 target.

Morgan Stanley said the recent slide in South Korean stocks was driven more by technical factors than by corporate fundamentals. It cited liquidations in leveraged exchange-traded funds, hedge funds and retail margin accounts. The deleveraging process is already past its midpoint, the bank said.

The Kospi has fallen about 30% from its June high. Morgan Stanley said profit-taking in semiconductor shares at the center of the AI investment boom accelerated the decline. The expansion of single-stock leveraged ETFs and heavy concentration in specific names also deepened the losses.

South Korea's financial authorities recently announced measures to restrict retail investment in leveraged products. The government plans to tighten rules, including by setting limits on leveraged-product holdings relative to an investor's total assets.

Morgan Stanley said valuations for Samsung Electronics Co. and SK Hynix Inc. should help support the market's floor. It also identified industrials, defense and financials as sectors poised to benefit.

Separately, Morgan Stanley upgraded Thai equities to overweight. The bank cited expanding foreign direct investment, improving corporate competitiveness, and benefits tied to AI investment and energy security.

By contrast, Morgan Stanley cut Australian equities to underweight, citing higher benchmark interest rates and changes to property tax policy.