Kospi could reach 10,500 in bull case, Morgan Stanley says, calling Tuesday's plunge a 'breather'

Morgan Stanley has described Tuesday's 9.9 percent plunge in the Kospi — widely called a "Black Tuesday" — as a temporary breather rather than a structural breakdown, and said the index could climb as high as 10,500 in a bull-case scenario.

In a report released Tuesday, Morgan Stanley said the Kospi fell about 10 percent that day, led by chipmakers and AI-related stocks, attributing the decline to several factors including weakness in Micron and unfavorable policy-related remarks.

The report said the Kospi underperformed peers such as Japan's Topix, which fell 1.3 percent, and Taiwan's Taiex, which fell 2.6 percent, due to its heavy exposure to memory chips and sensitivity to policy-related news.

The Kospi closed Tuesday down 910.71 points, or 9.99 percent, at 8,203.84 — the largest single-day point decline on record.

Morgan Stanley attributed the scale of the drop to fatigue built up after a prolonged rally.

Even so, the bank said the fundamentals of memory chips and surrounding AI-related stocks "remain solid," as those products continue to represent critical bottlenecks where supply cannot keep pace with surging AI demand.

The report said it does not view the correction as the beginning of a bear market, calling it instead "a necessary breather while awaiting clearer signals on policy direction and the AI investment story."

Morgan Stanley set its base-case Kospi target at 9,000, while projecting 10,500 in a bull scenario and 6,500 in a bear scenario.

The report said the market is now focused on reactions following shareholder meetings at Micron and Nvidia, as well as second-quarter earnings releases from Korean chipmakers. It added that it remains positive on beneficiary stocks including chipmakers, related holding companies and surrounding technology shares.

The bank forecast that market volatility will remain elevated for now.

"The market has entered a phase of expanded volatility," the report said, noting that a broader product and investor base brings the positive effect of greater liquidity while at the same time amplifying swings.

It added that the Kospi is likely to see continued wide fluctuations following the correction.

For portfolio construction, the report recommended a "barbell strategy" — concentrating holdings at two extremes by allocating one portion to high-growth, high-risk assets and another to defensive stocks, while keeping a relatively low weight in middle-of-the-road names.

Morgan Stanley had already set a Kospi target of 9,500 for this year in mid-May, saying 10,000 was achievable in a bull scenario.

On May 13, Yonhap News Agency cited a Morgan Stanley report from the previous day saying the bank expected the Kospi to sustain its upward momentum on the back of structural growth and reform continuity, projecting a year-end range of 6,500 to 9,500.

The bank set its first-half target at 8,500 and said 10,000 by year-end was possible in a bull scenario, with 6,000 as the floor in a bear case.

The report at the time argued that while South Korea's capital market had been perceived as cyclically sensitive and heavily weighted toward physical assets such as industrials and materials — a headwind for the Kospi — multi-year industry cycles in IT, energy security, defense, reconstruction, automobiles and robotics would support the outlook.

The Kospi traded in mixed territory Wednesday before recovering above the 8,400 level, shaking off the previous day's sharp losses.

The index closed up 267.18 points, or 3.26 percent, at 8,471.02.

It opened 152.95 points, or 1.86 percent, higher at 8,356.79, then extended gains to as high as 8,577.52, a rise of 4.55 percent. The index pulled back around midday, falling to 8,080.99 and briefly threatening the 8,000 level before turning higher again in the afternoon to close with solid gains.

The Kosdaq also recovered, closing up 17.79 points, or 2.00 percent, at 909.31 — reclaiming the 900 mark.