HSBC firmly "reduces holdings" in Korean stocks: a highly consensus trade with significant risks

As the market cheers nearly a 20% year-to-date gain in the Korean stock market, HSBC issues a warning: extremely crowded consensus trading is brewing significant risks.

On February 6, Herald van der Linde, Head of Asia Pacific Equity Strategy at HSBC, stated in a report that current optimism towards Korean stocks is approaching dangerous levels, with liquidity masking structural risks. The HSBC team admits that their “underweight” strategy on Korean stocks has missed significant gains, but the bank maintains that the key issue is not questioning the AI outlook, chip demand, or corporate governance improvements, but rather the overly concentrated trading and extremely optimistic sentiment.

Data shows that the current market consensus is highly unified: out of 44 analysts covering SK Hynix, 41 give a “buy” rating; Samsung Electronics even has no “sell” ratings. HSBC warns that this nearly unanimous bullish outlook often signals that risks are near. The report warns:

“If the AI narrative falters, investors may rush for the exits simultaneously. Even though the market has risen since the beginning of the year, we must highlight this risk. For that reason, we can only endure this pain with a stiff upper lip.”

Foreign investors quietly exit, while domestic retail investors push Korean stocks higher

Despite strong fundamentals, HSBC warns that the positive factors in the Korean stock market may already be overvalued, and capital flows have shown dangerous divergence. According to the HSBC report, the FTSE Korea Index components are expected to double their earnings by 2026, mainly driven by memory chip giants, with shipbuilding, defense, and other industrial sectors also growing in tandem. However, these positive factors are already fully reflected in stock prices.

A more critical signal comes from capital flows: foreign investors are taking advantage of the situation to reduce their holdings, and the current rally is almost entirely driven by domestic investors. The report states:

“Who is buying? Foreign funds are actually selling, while domestic investors are pushing the market higher.”

The main force behind the market rally is retail investors, especially individual investors entering through ETFs. Although the Korea National Pension Service (NPS) has increased its domestic stock allocation limit, its impact remains relatively limited. Meanwhile, Korea’s “Corporate Value Enhancement Plan,” despite progress in dividend tax incentives and board independence, still has significant room for improvement in increasing dividend payout ratios and reducing cash hoarding.

Against this backdrop, HSBC maintains its stance of reducing holdings in Korean stocks. The report warns that in a market environment where daily volatility can reach 5-6%, due to extremely overweight fund positions, any negative catalysts could trigger a concentrated sell-off. Although current valuations (around 10x forward P/E) seem reasonable, the overly crowded trading structure means the risk-reward ratio is increasingly deteriorating.

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