Ditch Korea, Buy Hong Kong? KOSPI-Hang Seng Tech Correlation Turns Negative, Signs of Short Covering

Earlier this year, global funds shorted Hong Kong tech stocks to raise capital for investments in South Korea's semiconductor giants. However, the latest correlation data indicates these trades appear to be rapidly unwinding.

Data shows the 20-day rolling correlation between South Korea's KOSPI index and the Hang Seng Tech Index has turned negative again, meaning the two markets are moving in divergent directions. As global capital sells off Korean large-cap stocks led by Samsung Electronics and SK Hynix (SKHY-US), it is simultaneously covering short positions in Hong Kong tech leaders such as Alibaba (09988-HK)(BABA-US) and Tencent (00700-HK).

(Source: Bloomberg)

The trigger for this capital shift lies in the severe volatility in South Korea's stock market. The KOSPI index has fallen sharply for two consecutive days this week, recently triggering circuit breakers multiple times. In contrast, Hong Kong's market has performed relatively strongly, with the Hang Seng Index rising about 10% in July while the KOSPI plunged approximately 23%, putting the Hang Seng on track for its best relative performance since 1983.

Multiple analysts have commented on this phenomenon. Morgan Stanley's Chief China Equity Strategist Laura Wang noted that Chinese markets have long served as a "funding source," providing capital for allocations to South Korea, Taiwan, and Japan. However, recent pullbacks in these markets have significantly eased pressure on Chinese equities.

CICC (China International Capital Corporation) analyzed that Hong Kong stocks, backed by low valuation advantages, improved capital structure, and ample room for short covering, are becoming a primary destination for global funds seeking defensive positioning.

Irvine Securities analyst Chan Wai-ming believes concerns over AI hardware oversupply have weighed on Japanese and Korean markets, prompting hedge funds to unwind "pair trades" and buy back previously over-shorted Hong Kong tech stocks.

Goldman Sachs further pointed out in a report that while China's AI industry accounts for only 10% of global AI market capitalization, it generates 16% of related revenues, indicating that Hong Kong tech stocks remain significantly under-owned and have further room for repositioning.