While the market celebrates the nearly 20% surge in Korean stocks this year, HSBC has issued a warning: an extremely crowded consensus trade is brewing significant risks.
On February 6, Herald van der Linde, Head of Equity Strategy, Asia Pacific at HSBC, stated in a report that the current optimism towards Korean equities is approaching a dangerous precipice, with liquidity masking structural vulnerabilities. The HSBC team acknowledged that its 'underweight' strategy on Korean stocks has missed substantial gains, but the bank insists the core issue is not about questioning the AI outlook, chip demand, or improvements in corporate governance. Instead, the problem lies in the excessive concentration of the trade and extreme investor optimism.
Data reveals a highly unified market consensus: among the 44 analysts covering SK Hynix, 41 have assigned a 'Buy' rating; Samsung Electronics does not have a single 'Sell' rating. HSBC warns that such a near-unanimous bullish sentiment often signals that risk is imminent. The report cautioned:
"If the AI narrative shows any signs of faltering, investors could rush for the exit simultaneously. Even though the market has risen since the start of the year, we must highlight this risk. For this reason, we can only grit our teeth and endure this pain."
Foreign capital is quietly exiting, while local retail investors drive the market higher. Despite strong fundamental data, HSBC warns that the positive factors for the Korean stock market may already be overpriced, and a dangerous divergence has appeared in fund flows. According to the HSBC report, earnings for constituents of the FTSE Korea Index are projected to double by 2026, primarily driven by memory chip giants, with industrial sectors like shipbuilding and defense also showing growth. However, these positive factors are already fully reflected in stock prices.
A more critical signal comes from capital flows: foreign investors are seizing the opportunity to reduce their holdings, with the current market rally being almost entirely fueled by domestic Korean investors. The report pointed out:
"Who is buying? Foreign funds are actually selling; it is domestic investors pushing the market higher."
The main force driving the market higher is retail capital, particularly individual investors entering through ETFs. Although the National Pension Service (NPS) has raised the upper limit for its domestic equity allocation, its impact is relatively limited. Meanwhile, while Korea's 'Corporate Value-up Program' has made progress in areas like dividend tax benefits and board independence, companies still have significant room for improvement in boosting dividend payout ratios and reducing cash hoarding.
Against this backdrop, HSBC maintains its underweight view on Korean stocks. The report warns that in a market environment where daily volatility can reach 5-6%, and with fund positions already heavily overweight, any negative catalyst could trigger concentrated selling. Although current valuations (approximately 10 times forward P/E) might appear reasonable, the overly crowded trade structure suggests the risk-reward ratio is deteriorating.
Comments