HSBC firmly "underweights" Korean stocks: a highly consensus transaction with huge risks

# Source: Wall Street Insights

# By Li Jia

As the entire market cheers the sharp surge in South Korea's stock market this year, HSBC has issued a contrarian warning that the current rally has become a highly crowded consensus trade. Despite strong earnings expectations and a dominant AI narrative, the near-unanimous bullish ratings and a capital structure driven by local retail investors have led to a sharp accumulation of risks. HSBC maintains an **Underweight** stance, arguing that any negative catalyst could trigger sharp market volatility and a concentrated sell-off.

While the market celebrates the nearly 20% gain in South Korea's stock market so far this year, HSBC has sounded the alarm: an extremely crowded consensus trade is brewing enormous risks.

In a report on February 6, Herald van der Linde, Head of Asia Pacific Equity Strategy at HSBC, stated that the current bullish sentiment towards South Korean equities is edging close to a dangerous threshold, with liquidity masking structural risks. The HSBC team admitted that its **Underweight** strategy on South Korean equities has missed the significant rally, but the bank insists that the crux of the issue is not questioning the AI outlook, chip demand or improvements in corporate governance, but rather the excessive concentration of trades and extreme optimism in market sentiment.

Data shows an overwhelming market consensus: 41 out of 44 analysts have given a **Buy** rating to SK Hynix; for Samsung Electronics, there is not a single **Sell** rating at all. HSBC warned that such a near-unanimous bullish landscape is often a precursor to impending risks. The report cautioned:

*"If the AI narrative falters, investors may rush for the exits all at once. Even as the market has risen since the start of the year, we must flag this risk. For this reason, we have to grit our teeth and endure this pain."*

## Foreign Capital Quietly Exits, Local Retail Investors Drive South Korean Equities Higher

Despite strong fundamental data, HSBC warned that the positives for South Korea's stock market may have been overpriced, and a dangerous divergence has emerged in capital flows. According to the HSBC report, earnings for constituents of the FTSE Korea Index are expected to double in 2026, driven primarily by memory chip giants, with industrial sectors such as shipbuilding and defense also growing in tandem. However, these positive factors have already been fully priced into stock prices.

A more critical signal comes from capital flows: foreign capital is taking the opportunity to reduce holdings, and the driving force behind this rally is almost entirely from local South Korean investors. The report noted:

*"Who is buying? Foreign funds are actually selling, and it is domestic investors that are pushing the market higher."*

The main force fueling the market rally is retail capital, particularly individual investors entering the market via ETFs. While the National Pension Service (NPS) of South Korea has raised its allocation cap for domestic equities, its impact has been relatively limited. At the same time, although South Korea's **Corporate Value Enhancement Program** has made progress in areas such as dividend tax incentives and board independence, companies still have significant room for improvement in raising dividend payout ratios and reducing cash hoarding.

Against this backdrop, HSBC has maintained its Underweight view on South Korean equities. The report warned that in a market where daily volatility can reach 5-6%, with fund positions already extremely overweighed, any negative catalyst could trigger a concentrated sell-off. While current valuations (at around 10x forward price-to-earnings ratio) may seem reasonable, the overly crowded trading structure means the risk-reward ratio is deteriorating.

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