Kospi Enters Bull Market After 25% Rebound as Wall Street Eyes Hedge Fund FOMO

The Kospi has entered a technical bull market, rebounding more than 20% from its late-July low in just 10 days. Fears of another Federal Reserve rate hike have eased, while a run of developments has calmed worries about AI monetization and the memory-chip cycle. With volatility in the once roller-coaster Kospi subsiding, Wall Street is watching for a return of rule-based buying and hedge funds that missed the rebound.

Foreign Investors Return, Buy 8.21 Trillion Won ($5.93 Billion) in Four Days

On Aug. 14, the Kospi closed 2.41% higher at 6,977.34. Foreign investors drove the advance with net purchases of 3 trillion won ($2.17 billion). The index climbed as high as 7,010 in early trading before surrendering part of its gains on profit-taking by retail and institutional investors. It was the first time the Kospi traded above 7,000 intraday since July 24, 15 trading days earlier. The Kosdaq, which had turned negative during the session, ended up 0.38% at 864.64 as retail investors bought.

Overnight news from the US added support. July producer prices were unchanged from the previous month, easing concern that the Fed could move quickly to raise rates again. In rate futures markets, the implied probability of a Fed hike in September fell to 33% from 58% a month earlier.

AI-related news also boosted sentiment. At its investor day, SanDisk said price-protection clauses in long-term supply contracts would allow it to maintain an 80% gross margin even if NAND prices fell to their bottom. The company also issued long-term sales and margin guidance that exceeded market expectations. It said it would use 100% of free cash flow left after reinvestment for share buybacks, sending its shares up 14%. Samsung Electronics Co. and SK Hynix Inc. each rose about 3%.

News that LG Electronics Inc. and Nvidia Corp. are fleshing out a physical AI alliance covering robotics, autonomous vehicles and AI factories also helped ease concerns about AI monetization. Reports that annualized revenue and valuations at Anthropic and OpenAI are surging added to the improved mood.

The Kospi has now risen for five straight trading days and is up 25% from its July 30 low. The standout change in this rebound has been foreign investor flows. According to the Korea Exchange, foreign investors were net buyers of 8.2093 trillion won ($5.93 billion) on the Kospi market from Aug. 11 through Aug. 14. Goldman Sachs' sales desk estimated that about 90% of that buying was concentrated in technology shares. Foreign selling, which had amplified last month's slump, has for now reversed.

Wall Street Sees More Room to Rise

Wall Street says the Kospi still has room to advance. One reason is that much of the leverage and crowded positioning built up in the market was flushed out during July's sharp selloff. JPMorgan said domestic brokerages are raising margin-lending limits again, while foreign investors are also increasing swap limits used to gain exposure to Korean equities through derivatives. That points to the end of deleveraging and the potential start of a new round of debt-fueled buying.

A more decisive factor is the normalization of volatility. In May and June, leverage and speculative demand drove the Kospi and volatility higher at the same time, an unusual pattern. This month, market swings have eased quickly. JPMorgan said rule-based money that automatically increases equity exposure when volatility falls could start returning. Even so, the bank expects gains to come more slowly than in the past because participation by leveraged ETF and derivatives investors has declined.

The prospect of hedge-fund chasing has also come into focus. Goldman Sachs said hedge funds sharply cut long positions in Korean stocks during July's selloff but were slow to rebuild them during the rebound. If the index extends its gains, fear of missing out could trigger late buying, the bank said.

Bin Nan-sae, Hankyung.com reporter binthere@hankyung.com