SEOUL: A wave of optimism over South Korean stocks is giving way to growing caution, as some investors hedge positions and pare back crowded trades on concerns that the rally has run too hot, too fast.
Hedge fund Golden Horse Fund Management has trimmed exposure and added derivative protection, while M&G Investments has cut memory and foundry holdings to broaden out down the artificial intelligence supply chain.
A Bloomberg Intelligence analysis of options on the iShares MSCI South Korea ETF shows investors seeking protection against a decline. The fund tumbled 14% last Friday in the United States.
The moves highlight the challenge facing global money managers.
While investors remain upbeat about Samsung Electronics Co and SK Hynix Inc, the two chip giants that powered Kospi’s more than 90% rise this year, many are becoming pickier about where to put new money and keeping cash ready for opportunities elsewhere.
Last Friday’s selloff in US tech stocks, driven by fears of higher interest rates, shows how quickly popular trades can unwind once sentiment shifts.
That risk could spillover into South Korea once local markets open.
“We’ve been trimming gross exposure at the margin and layering derivative protection over the last few weeks,” said Yi Ling Ong, managing partner at Golden Horse Fund.
Several large initial public offerings, including a SpaceX listing this month, could lead to rotation as funds raise cash to participate, making it “prudent to hold some dry powder,” she said.
The caution is showing up in the derivatives market.
“The debate isn’t whether the Kospi story remains attractive – it’s how to stay invested without giving back a portion of the gains,” said Tanvir Sandhu, global chief derivatives strategist at Bloomberg Intelligence.
Options activity in the EWY ETF suggests investors are becoming more cautious, with demand shifting from upside exposure to downside protection, he said.
To be sure, the rotation doesn’t signal investors turning bearish on South Korea.
Valuations remain cheaper than in rival tech hub Taiwan and investors say the market still offers one of the strongest AI-linked stories in global equities.
At 8.6 times forward earnings, the Kospi trades below its five-year average of 10 times and is much cheaper than Taiwan’s benchmark, which trades at about 20 times, data compiled by Bloomberg show.
Earnings upgrade cycle has also started to broaden. Excluding Samsung and SK Hynix, the rest of the Kospi is now expected to deliver more than 50% profit growth this year, up from just 20% in January, according to Golden Horse Fund.
“The speed of the rally has been vertiginous but in this type of market I would rather let the rally continue,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA.
“Exiting now will make it very difficult to re-invest later if the market doesn’t correct.” — Bloomberg
