Bloomberg shifts from bullish to cautious on South Korean stocks

Global investors trim positions, ramp up hedges

Korea market still seen as attractive despite correction fears

The Kospi fell below 8,000 and hit 7,400 during trading Monday amid rising caution among global investors. Some overseas investors have begun locking in profits while stepping up derivative-based hedging strategies.

Bloomberg reported Sunday that optimism toward South Korean stocks is giving way to caution, with some investors moving to hedge positions and pare back crowded trades.

A prominent example is Singapore-based hedge fund Golden Horse Fund Management, which has recently cut its exposure to South Korean equities while adding derivative-based protection.

Managing Partner Yiling Ong said the firm had been "gradually trimming exposure and layering on derivative protection over the past few weeks." She added that it was wise to "keep some dry powder" given that major initial public offerings — including SpaceX's listing this month — could trigger rotation out of existing positions.

Caution is also visible in the options market. Demand for downside protection has been outpacing bullish bets in options trading on the iShares MSCI South Korea ETF listed in the United States. The fund tumbled 14 percent in the US market on June 5.

Domestic brokerages are also sounding warnings. Jung Da-woon, a researcher at LS Securities, said in a report Monday that the firm is "factoring in a drawdown of more than 20 percent from the Kospi's peak," citing the need to account for the interest rate environment and structural changes in the market.

Historical precedent lends weight to the cautious view. During previous rate-hiking cycles, the Kospi's maximum drawdown from prior highs reached minus 26.5 percent in August 2019 and minus 34.8 percent in September 2022.

Jung said no bottom signal has yet been detected in the current selloff, and that the SpaceX listing, a Federal Open Market Committee meeting and US election campaigning around Independence Day could all act as additional sources of volatility. However, caution does not necessarily translate into pessimism on Korean stocks. Tanbir Sandhu, chief global derivatives strategist at Bloomberg Intelligence, said the debate is "not whether the Kospi story is still attractive, but how to stay invested without giving back some of the gains."

Valuations remain compelling. The Kospi's 12-month forward price-to-earnings ratio stands at 8.6 times, below its five-year average of 10 times and well below Taiwan's roughly 20 times, suggesting the market remains undervalued.

The earnings outlook is also favorable. Golden Horse Fund said the projected net profit growth rate for Kospi-listed companies excluding Samsung Electronics and SK Hynix has been revised up from around 20 percent in January to more than 50 percent recently.


moon@heraldcorp.com