Since the start of the year, voices warning of overheating are growing among global investors regarding Korea's stock market, which has been called "the world's hottest market." Still, some analysts say it is premature to conclude the rally has fully broken, because growth potential centered on artificial intelligence (AI) chips remains intact.
On the 7th (local time), Bloomberg reported that while expectations remain for the AI chip rally led by Samsung Electronics and SK hynix, some hedge funds and asset managers are strengthening hedging strategies based on the judgment that the recent pace of gains has been excessively fast. Bloomberg said, "Optimism about Korea's stock market remains strong, but investors are also preparing defensive strategies to protect revenue, given how quickly the recent rally has unfolded."
In fact, global investors are moving to adjust their allocation to Korean equities. Hedge fund Golden Horse Fund Management recently trimmed its Korea equity exposure and expanded hedging using derivatives. U.K. asset manager M&G Investments is reducing positions in memory chip and foundry-related stocks such as Samsung Electronics and SK hynix, while broadening its investments to other beneficiary industries within the AI supply chain.
This caution is also evident in the derivatives market. Bloomberg Intelligence (BI) analyzed options trading in the iShares MSCI Korea ETF (EWY), a Korea stock exchange-traded fund listed in the U.S., and found investor interest shifting from additional upside bets toward protection against downside risk. Tanvir Sandhu, BI's chief strategist, said, "The debate on Wall Street is no longer 'Is Korea's stock market attractive?' but 'How do we maintain exposure while still protecting the revenue we have made so far?'"
However, Bloomberg assessed that these moves do not signify a turn to pessimism about Korea's stock market. Global investors still view Korea as an attractive AI investment destination, and the recent increase in hedging is seen as natural risk management after a surge, rather than a denial of the uptrend itself. Some investors interpret the recent hedging not as "preparing to give up the bull market," but as a "risk management strategy to stay in the bull market longer."
The optimism is underpinned by still-attractive valuations and expectations for earnings improvement. According to Bloomberg's compilation, the Korea Composite Stock Price Index (KOSPI)'s 12-month forward price-earnings ratio (PER) is 8.6, below the recent five-year average of 10. Given that Taiwan's expected PER is around 20, some say Korea looks relatively undervalued.
Corporate earnings outlooks are also improving. According to Golden Horse Fund, the projected growth rate of this year's profits for KOSPI-listed companies excluding Samsung Electronics and SK hynix has risen from about 20% at the start of the year to more than 50% recently.
However, market risks have not disappeared. Bloomberg noted that outflows of foreign funds and increased leverage among individual investors could heighten future market volatility. There are also concerns that the craze for leveraged ETFs and the expansion of single-stock options transactions could together amplify market swings.
Rajeev De Mello, macro portfolio manager at GAM Asset Management, said, "It's true the speed of the recent rally has been dizzyingly fast," but added, "Korea still has one of the strongest AI growth stories in global markets." He continued, "If you completely exit now, it may be difficult to reenter if the bull market continues."