To The Moon

A remarkable shift in global capital flows is underway as international funds execute a sudden and dramatic pivot away from South Korea and back into Hong Kong stocks.

Earlier this year, the consensus trade was to short Hong Kong tech giants while pouring money into Korean memory chip leaders to ride the AI hardware wave. However, following the collapse of memory stock valuations and a nearly 30% monthly plunge in the KOSPI index, these same funds are now aggressively covering their short positions in Hong Kong while simultaneously selling their Korean chip holdings.

The 20-day rolling correlation between South Korea's KOSPI and Hong Kong's Hang Seng Tech Index has flipped back into negative territory. This negative correlation pattern indicates that as global funds sell Korean stocks led by Samsung Electronics and SK Hynix, they are simultaneously buying back short positions in Hong Kong tech stocks like Alibaba and Tencent. A capital migration once driven by AI mania is now reversing at an accelerated pace. While the AI bull market may not be over, the "buy all the picks-and-shovels indiscriminately" phase has ended, suggesting the AI investment narrative is shifting from "hardware first" to "applications first."

Correlation Reversal: From Short Hong Kong, Long Korea to the Complete Opposite

At the start of the year, the operating logic for global funds was clear and consistent: short Hong Kong tech stocks, such as Alibaba and Tencent, which were viewed as AI laggards, to raise capital for a full-scale bet on Korean memory chip giants SK Hynix and Samsung Electronics. This strategy was effective during the AI hardware bull run. However, since July, this trade structure has been rapidly unraveling.

The 20-day rolling correlation between the KOSPI and the Hang Seng Tech Index has turned negative once more, meaning the two indices are moving in opposite directions—direct evidence of this global fund reversal. Market analysts suggest this pattern reflects global funds selling Korean stocks dominated by chipmakers Samsung Electronics and SK Hynix, while covering short positions in Hong Kong tech stocks like Alibaba and Tencent.

Examining capital flows, the reversal is even clearer. From 2026 to the present, foreign capital has seen a net outflow of over $100 billion from the Korean stock market. Concurrently, short sellers in Hong Kong are taking massive profits. As of July 3, the value of outstanding short sales on the Hong Kong Stock Exchange reached 2.43% of total market capitalization, a historical high. CITIC Securities predicts that the entry of incremental capital will trigger a short squeeze, driving a market rebound.

Morgan Stanley's Chief China Equity Strategist, Laura Wang, noted in a report that global investors have told her that Hong Kong and mainland China have been acting as "financing shorts," providing funds to increase allocations to South Korea, Taiwan, and Japan. "The recent corrections in these markets have significantly alleviated the pressure on China," she wrote. CITIC Securities analysis points out that Hong Kong stocks, with their valuation advantages, improved capital structure, and potential for short covering, are becoming a primary destination for global capital shifting from crowded trades to undervalued assets.

South Korean Stock Market Crash: The Ripple Effect of a Memory Bubble Burst

The trigger for this reversal was an epic crash in the South Korean stock market. On "Black Tuesday," July 28, the KOSPI index closed down a staggering 10.84% at 6,023.66 points, its largest single-day drop since the Iran war broke out on March 4. The index fell as much as 11.3% during the session, triggering the year's eighth circuit breaker and the 14th in the index's history. For the month, the KOSPI has fallen roughly 29%, surpassing the previous monthly record of 27% set in October 1997. The index has now declined 34% from its June peak of 9,114.55 points.

Memory chip giants were at the epicenter of the selling storm. SK Hynix plummeted 14.7% after its ADR in New York fell to a record low, dropping below its US IPO price. Samsung Electronics fell 14.4%, its biggest single-day drop since October 2008. These two stocks together account for more than half of the KOSPI's weighting, amplifying the shock to the entire market. Foreign investors net sold 3.7 trillion won (approximately $2.7 billion) in a single trading day. Since SK Hynix shares hit an all-time high in June, its market capitalization has shrunk by about $570 billion. Micron Technology has fallen 35.4% from its year-high, while SanDisk has dropped 53.6%.

Leveraged ETFs have further amplified the downward spiral. In May of this year, the Korea Exchange approved the first 16 single-stock 2x leveraged ETFs tracking SK Hynix and Samsung Electronics. Leveraged products naturally exacerbate selling pressure during market downturns.

Hong Kong Emerges as the Biggest Beneficiary: Best Relative Performance in 40 Years

In this capital reversal, the Hong Kong stock market has emerged as the biggest winner. Since July, the Hang Seng Index has risen approximately 10%, while the KOSPI has plunged around 23%. This disparity puts the Hang Seng Index on track to record its best monthly outperformance against the KOSPI since the latter was launched in 1983.

Alibaba, Xiaomi, and Meituan have been the biggest winners, each gaining over 25%. In contrast, Samsung and SK Hynix have fallen by at least 25% in the same period. On July 8, the Hang Seng Tech Index surged 4.97% in a single day, its largest intraday gain since 2026, with Alibaba soaring over 12%. Huatai Securities noted that this week saw "short sellers actively taking profits, leading to a technical market repair," with Hong Kong stocks leading the gains in sectors that previously had the largest short interest.

Goldman Sachs released a report on July 13, pointing out that the total market capitalization of China's AI sector is only 10% of the global AI market, but it generates 16% of global AI-related revenue. Meanwhile, global fund allocation to Chinese AI stocks is a mere 1.2%. This suggests that Hong Kong tech stocks are still severely underweighted, presenting significant room for continued covering.

Hong Kong is becoming a major beneficiary of capital fleeing chipmakers. Data shows that after short selling activity in Hong Kong hit a monthly high in early to mid-July, it cooled down significantly across various stocks in late July. Southbound capital net inflows reached HK$39.1 billion in the week of July 6-10, a weekly high since April. The essence of this rebound is a massive unwinding of hedge fund "pair trades" triggered by a major restructuring of global capital arbitrage models. Analyst Chen Weiming from Bright Smart Securities noted that concerns over an oversupply of AI hardware have dragged down Japanese and Korean stocks, triggering hedge funds to adjust their positions by buying back Hong Kong internet stocks that were previously heavily shorted.

Wall Street Debates: The "Five Catalysts" Popping the AI Chip Bubble

A mid-July poll by Seeking Alpha of 618 institutional and active investors showed that the Nasdaq 100 ETF (QQQ) has fallen from its highs. The market is closely evaluating potential catalysts that could deflate the AI computing and hardware chain's valuation bubble.

1. Panic Selling in Memory Chips and Order Concerns

Nearly 40% of respondents believe a sell-off in memory chips will be the first domino to fall in an AI valuation tsunami. Micron Technology (MU.US) shares have slid from their June 24 earnings-day high of $1,048 to around $800. In a conference call, Micron's Chief Business Officer Sumit Sadana explicitly noted that a $22 billion, five-year prepayment agreement with a strategic customer "would be refunded if terminated due to contractual terms." Should a major customer scale back cooperation, Micron would need to lower its earnings guidance, impacting its previously maintained "A" grade forward valuation score.

SK Hynix (SKHY.US) and SanDisk (SNDK.US) have also faced valuation pressure. Front-end chip giants like Nvidia (NVDA.US), Broadcom (AVGO.US), and TSMC (TSM.US) have had their Quant valuation ratings downgraded to "D" or lower, suggesting that hardware valuation premiums are extremely fragile.

2. Hyperscaler CapEx Shows Initial Signs of Strain

Last week, Alphabet (GOOGL.US) reported second-quarter data showing its capital expenditure surged to $44.9 billion, exceeding its $39.1 billion in operating cash flow, leading to negative free cash flow. Alphabet's stock subsequently dropped from $348 to $328 (as of July 28). The market fears that if Microsoft (MSFT.US), Meta (META.US), and Amazon (AMZN.US) follow with higher-than-expected CapEx, it will trigger further selling.

Apple (AAPL.US)'s hedging strategy: In contrast, Apple, focusing on on-device AI and incorporating Google Gemini for high-compute requests, has only incurred moderate expenditure, propelling its market cap to a historic $5 trillion. Furthermore, Nvidia's "circular financing" is fueling AI bubble fears. Reports indicate Nvidia is discussing providing approximately $250 billion in financing guarantees for an OpenAI large-scale data center project, with another financing arrangement for chip purchases of up to $350 billion. This has sparked deep market concern about the "circular financing model"—where chip companies, cloud firms, and AI companies continually expand investment, but the ultimate return on such massive capital is unknown. Vey-Sern Ling, Managing Director at Bank of Singapore, stated, "Greed has turned into fear for AI-related semiconductor stocks."

3. Data Center Approvals Face Community Resistance and Environmental Bans

A March poll showed 70% of Americans oppose building new AI data centers in their local areas. A policy red line emerged on July 14 when New York State enacted a moratorium on new data center permits for facilities over 50 megawatts. The downstream impact is severe. Fiber and equipment suppliers have been hit hard. Corning (GLW.US) plunged 18% in a single day due to poor earnings, while Ciena (CIEN.US) and Lumentum (LITE.US) also fell sharply.

4. China's Open-Source AI Models Reshape the Cost-Performance Equation

Chinese AI lab Moonshot AI has officially released its open-weight model, Kimi K3. This poses a significant business model challenge. Kimi K3 supports free local deployment and operation, drastically reducing AI implementation costs for enterprise software vendors but putting immense pressure on subscription-based, closed-source business models like Anthropic, OpenAI, and Microsoft Copilot. Software stocks rallied on the news, with CrowdStrike (CRWD.US), SAP (SAP.US), Salesforce (CRM.US), Adobe (ADBE.US), and ServiceNow (NOW.US) all experiencing a collective surge.

Additionally, the rise of China's semiconductor industry is triggering a competitive revaluation. China's fourth-largest memory chip maker, CXMT, raised approximately $8.6 billion in its IPO on Monday, becoming one of the highest-valued listed companies in China after its first trading day. Mirae Asset Securities analyst Kim Seok-hwan commented, "Market concerns are not about CXMT's current profitability, but its potential to accelerate capacity expansion post-IPO to compete with Korean companies." Meanwhile, reports that Chinese firms have begun mass production of immersion DUV lithography machines caused ASML shares to plunge 8.5%.

5. Mega-IPOs Drain Market Liquidity

SpaceX (SPCX.US) completed its IPO with a massive $2 trillion valuation, absorbing significant marginal liquidity from the market. However, its stock price has been on a downward trend since the open, falling to $135 (near its 52-week low of $107.02). An upcoming lockup expiry in August will release even more shares. As the Nasdaq index mandates inclusion of SPCX, passive funds are forced to buy at any price. The market fears that if Anthropic and a planned 2027 IPO by OpenAI follow with giant listings, the poorly-supported chatbot concept will face a severe liquidity test.