South Korea's stock market is undergoing a powerful rebound, but the real story may be the "position gap" lying beneath the surface.
The KOSPI index surged 11.5% this week, its largest single-week gain in over three months, finally snapping a seven-week losing streak. The rally was led by semiconductor stocks, with Samsung Electronics and SK Hynix jumping 19% and 16% respectively this week. Foreign investors have also aggressively re-entered the Korean tech sector.
However, during the prolonged downturn, hedge funds had significantly slashed their KOSPI positions. Current institutional holdings are now clearly lagging behind the index's sharp recovery. In other words, the market has already moved up substantially, but a significant portion of major institutional capital has yet to return. If the index continues to climb, these underweight institutions may be forced to chase the rally, potentially pushing this rebound into a full-blown "short squeeze."
This potential driver is particularly noteworthy: foreign buying is returning, tech stocks are leading the charge, while retail investors are taking profits. Margin trading has also receded markedly due to tighter regulatory oversight. In this context, the key question for the KOSPI's future trajectory may shift from "Is there money to buy?" to "When will underweight funds be forced to buy back in?"
Tech Stocks Lead the Charge as KOSPI Stages a Strong Rebound
The KOSPI closed 2.42% higher on Friday at 6,977.94 points, its highest close since July 23, marking its fifth consecutive day of gains. The index has risen 11.5% for the week, its best weekly performance in over three months. From its July 30 low, the KOSPI has now rebounded over 22%, following a seven-week losing streak that saw a cumulative decline of nearly 31%.
Chip stocks remain the core driver of the rally. Samsung Electronics rose 2.43% on Friday, and SK Hynix gained 3.26%, bringing their weekly advances to 19% and 16%, respectively. Daishin Securities analyst Lee Kyoung-min attributed the positive sentiment in the semiconductor sector, and by extension Korean memory chip stocks, to signals of long-term growth potential and high profitability sent by US memory chip maker SanDisk.
Other heavyweight stocks also performed strongly. Hyundai Motor rose 8.24% on Friday, Kia Motors gained 3.13%, and LG Energy Solution added 1.09%. Of the 906 stocks traded during the day, 677 advanced, while only 204 declined.
Foreign Capital Returns to Tech While Retail Investors Cash Out
Capital flows further confirm the structural nature of this rebound: foreign investors and institutions are buying again, while retail investors are using the rally to take profits.
According to Goldman Sachs' sales desk data, foreign investors were net buyers of KOSPI stocks to the tune of approximately $1.2 billion this week, with nearly all of this, around $1.1 billion, concentrated in the technology sector. Reuters data showed net foreign buying for the week totalled about 3 trillion won. Local institutions were also net buyers, with roughly $383 million in net KOSPI purchases, including $432 million specifically in tech stocks.
Conversely, retail investors continued to take profits, with net selling in the tech sector alone reaching approximately $1.5 billion. The overnight rise in the Philadelphia Semiconductor Index, combined with optimistic market expectations regarding shareholder returns from Samsung Electronics and SK Hynix, provided further emotional support for Korean chip stocks.
Hedge Funds are Underweight, Setting the Stage for a Potential Short Squeeze
Compared to the return of foreign capital, the low positioning of hedge funds may be the more significant variable for this market. During the KOSPI's consecutive decline, hedge funds had already drastically reduced their exposure to Korean equities. Now, the index has rebounded sharply from its lows, but institutional positions have not recovered in tandem, creating a clear divergence between index performance and asset allocation.
This suggests the market may be forming a potential "position vacuum."
If the KOSPI continues to advance, institutions that are underweight Korean assets may face increasing performance pressure, potentially forcing them to re-enter the market. This could trigger a positive feedback loop of "rising prices forcing position covering, which in turn drives prices higher."
Currently, the Philadelphia Semiconductor Index still holds a significant lead over the KOSPI. If the Korean market continues to play catch-up with the performance of overseas semiconductor stocks, the pressure on previously heavily reduced funds to cover their positions could intensify further.
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