South Korea's Bull Market Triggers Investor Calls for Risk Management

Korean Stocks Face Growing Caution as Rally Fades

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 AI supply chain.

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. 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 Korea once local markets open.

Bloomberg Intelligence analysis of options on the iShares MSCI South Korea ETF shows investors seeking protection against a decline. The fund tumbled 14% on Friday in the US. The benchmark also tumbled 7% at one point on Friday.

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The caution is showing up in the derivatives market. Options activity in the EWY ETF suggests investors are becoming more cautious, with demand shifting from upside exposure to downside protection. Some investors are looking for opportunities beyond Samsung Electronics and SK Hynix, whose meteoric rise propelled them into the $1 trillion valuation club and helped Korea briefly overtake India as the world's sixth-largest stock market.

Not all investors are turning bearish on 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.

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.

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However, foreign outflows have become a concern. Global funds have pulled a record $76 billion this year, selling in every session over the past month. While part of the retreat is due to technical limits on single-stock holding, the selling has been absorbed by more fickle retail investors — a dynamic that may heighten volatility.