Bloomberg: Global investors grow cautious on Kospi rally, some hedge positions

Global investors are growing more cautious about the Korean stock market rally amid overheating concerns, as the Kospi fell below the 8,000 mark on Monday, according to a foreign media report.

Bloomberg reported Sunday that optimism over Korean equities is giving way to caution, with some investors trimming crowded positions and adding hedges.

Singapore-based hedge fund Golden Horse Fund Management has cut its exposure and layered on derivative protections. Managing partner Yiling Ong said the firm had been "gradually reducing exposure and stacking derivative protections over the past few weeks," adding that it was "wise to keep some dry powder" as major IPOs this month — including a SpaceX listing — could trigger rotation.

British asset manager M&G Investments has also reduced its holdings in memory chip and foundry stocks to diversify its AI supply chain exposure more broadly.

Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence, said the debate is no longer whether the Kospi story remains compelling, but "how to stay invested without taking some profits off the table."

Options activity on the iShares MSCI South Korea ETF (ticker: EWY) — the most widely traded Korea-focused equity fund listed in the United States — suggests investors are growing increasingly defensive, with demand shifting from upside exposure to downside protection. EWY tumbled 14% in the US market on June 5.

That day's sharp selloff in US technology stocks, triggered by rising interest rate concerns, illustrated how quickly crowded trades can reverse when sentiment shifts.

Bloomberg warned the shock could spill over into Korea when domestic markets opened.

The Kospi has surged more than 90% this year, led by Samsung Electronics and SK Hynix, making it the world's best-performing major market. Both companies have joined the $1 trillion market capitalization club.

The Korean stock market briefly overtook India to become the world's sixth-largest equity market by market capitalization. But the prolonged rally has deepened concentration in large-cap stocks, and the Kospi fell as much as 7% at one point on Friday.

Bloomberg noted, however, that the growing caution does not signal a bearish turn.

The Kospi's 12-month forward price-to-earnings ratio stands at 8.6 times, below its five-year average of 10 times and still well below Taiwan's roughly 20 times. According to Golden Horse Fund, the net profit growth outlook for Kospi stocks excluding Samsung Electronics and SK Hynix has also improved sharply — rising from 20% in January to more than 50% now — suggesting the earnings recovery is broadening.

Rajeev de Mello, global macro portfolio manager at Swiss asset manager Gama Asset Management, said the pace of the rally was "dizzying" but that it was better to let it run. "If you get out now and the market doesn't correct, it will be very hard to reinvest later," he said.

Meanwhile, foreign capital outflows have emerged as a concern.

Global funds have pulled a record $76 billion from Korean equities this year and have sold on every trading day over the past month. Analysts warn that retail investors, who have absorbed much of that selling, could amplify market instability given their higher volatility.

The growing popularity of leveraged ETFs and plans to introduce weekly single-stock options have also been flagged as potential sources of added volatility. Stefan Martin, head of institutional derivatives sales for Asia at European financial firm Optiver, warned that "if there is a reversal, the market is in a somewhat uncomfortable position."