Moment of reverse pick-up? Korean stocks face "mechanical selling wave": "Storage giants" surge triggers position red line, AI bull market fundamentals remain unchanged.

Driven by the global artificial intelligence (AI) investment frenzy, the stock prices of South Korea's chip giants - Samsung Electronics and SK Hynix - continue to soar. However, this capital feast is creating an unprecedented dilemma for global fund managers. Due to the rapid expansion of the market value of these two companies, an increasing number of international funds are hitting the single stock holding limit and are forced to initiate mechanical selling operations. Analysts believe that this passive selling triggered by regulatory rules has become a significant driver of the recent drastic fluctuations in the South Korean stock market and the large-scale outflow of foreign funds. AI market boosts trillion-dollar chip giants: "rising too fast," funds are forced to sell With the continued explosion of global AI infrastructure investment, as suppliers of high-bandwidth memory (HBM) and advanced chip cores, Samsung Electronics and SK Hynix have become the focus of international capital chase. The market value of the two companies recently officially surpassed the $ 1 trillion mark. In the past year, SK Hynix's stock price has increased by over 1000%, and Samsung Electronics' stock price has also increased by over 400%. The combined market value of the two companies has exceeded $ 1 trillion, making them one of the hottest assets in the Asian technology sector. In comparison, Taiwan Semiconductor Manufacturing Company (TSMC), which has also benefited from the AI boom, has only seen an increase of about 137% during the same period. The rise in the South Korean semiconductor sector has been much more aggressive. Meanwhile, the latest move by South Korea's National Pension Service (NPS) has further strengthened the market's bullish sentiment. The Ministry of Welfare of South Korea announced this week that NPS, the world's third-largest pension fund, has significantly increased its domestic stock allocation target from 14.9% to 20.8% by the end of 2026. The market generally expects that a large amount of newly allocated funds will continue to flow into core technology assets such as Samsung Electronics and SK Hynix. Stimulated by this news, the stock prices of the two companies rose again on Friday. 10% holding limit, long positions forced to take profits However, for global asset management firms, the problem lies in the fact that the stock prices have been rising too fast. According to the decentralized regulatory rules in most international markets, mutual funds are usually not allowed to allocate more than 10% of their assets to a single stock, and the total percentage of high-weight stocks exceeding 5% usually should not exceed 40%. These regulatory rules, aimed at preventing over-concentration of investments and reducing portfolio risks, have turned into mechanical selling pressure in the face of the ultra-fast rise in the South Korean stock market this year. As the weights of Samsung Electronics and SK Hynix rapidly expand, more and more funds are forced to deleverage to meet compliance requirements. GAM Investment Management, headquartered in Zurich, and Jupiter Asset Management in Singapore have begun to adjust their portfolio structures to avoid exceeding regulatory limits. Christian Heck, a portfolio manager at First Eagle Investments, said that these rules were originally designed to reduce concentration risk, but in extreme market conditions, even if the fund managers are still bullish on the related stocks in the long run, they have to execute sell operations. Florian Neto, head of Asian investments at Amundi SA, admitted, "It is currently more of a profit-taking at the portfolio construction level. The problem is that the growth rate of these stock prices is too fast; it has reached a point where investors have to sell because they need to diversify risk." South Koreas market facing historically large scale outflow of foreign funds This "passive deleveraging" effect is creating a clear impact on the Korean capital market. As of Thursday, global investors have sold a net of $ 63.6 billion worth of South Korean stocks this year, marking the largest monthly outflow of foreign funds since records began in 1999. Of this amount, the two companies Samsung Electronics and SK Hynix alone have seen a total net outflow of $ 58.6 billion this year. According to Goldman Sachs, since the end of October last year, the total size of mechanical selling triggered by diversified investment rules has reached approximately $ 69 billion. This involves funds related to Korea with assets under management close to $ 200 billion. Timothy Moe, a strategist at Goldman Sachs, pointed out, "If the concentration of Samsung Electronics and SK Hynix in the South Korean stock market continues to increase, they may still face further selling pressure in the future. However, most of the passive selling pressure may have already been released." Market participants believe that this phenomenon is highly similar to the "weight dilemma" that Taiwan Semiconductor Manufacturing Company faced a few years ago in the Taiwanese market. Due to the high index weight of TSMC, many funds were forced to engage in "alternative allocation" through the supply chain, holding companies, or affiliated enterprises. Now, this phenomenon is rapidly replicating in the South Korean market, and at a faster pace and larger scale. Funds are turning to "shadow semiconductor assets": clever money's way out In the background of restrictions on direct holdings, more and more investment institutions are looking for opportunities for "proxy trades," indirectly betting on the South Korean AI industry chain through affiliated companies. For example, SK Square, which holds a 20.5% stake in SK Hynix, has seen its stock price increase by over 1000% in the past year. Similarly, Samsung Life Insurance, holding an 8.58% stake in Samsung Group's core assets, has seen its stock price triple during the same period. Ha SeokKeun, chief investment officer at Eugene Asset Management, said, "Investors may expand their exposure to the South Korean semiconductor industry by holding significant stakes in holding companies, insurance companies, or affiliated enterprises of these chip manufacturers." Market analysts believe that these "shadow technology assets" may become a new direction for international funds' allocations in the future. Recent fund flows also confirm this trend. Data from the Korea Exchange shows that on May 27, institutional investors like "retirement funds" made a net purchase of SK Square amounting to 13.951 billion Korean won, making it the second-largest net purchase amount of the day after Samsung Electronics; while these funds net sold 2.5 billion Korean won worth of SK Hynix on the same day. The shift of institutional funds from direct holdings to indirect holdings is clearly visible. Attraction of South Korean technology assets continues to strengthen Although passive selling pressures may persist in the short term, some institutions believe that the long-term attractiveness of South Korean technology stocks has not diminished. It is worth noting that South Korea's domestic fund rules actually provide special exemptions for Samsung Electronics and SK Hynix. Although South Korean mutual funds also face a 10% single holding limit, these two companies can receive overweight allocations based on their market value weight. Fund managers in South Korea can hold these two stocks up to their actual market value weight - currently, Samsung and SK Hynix's market value weights are as high as 27.05% and 15.71%, respectively. Although the mechanical selling in the short term has caused pain in the market, it is not due to deterioration in the fundamentals of the companies. Analysts believe that this actually provides a great opportunity for long-term funds to enter the market. Sam Konrad, an investment manager at Jupiter Asset Management, said, "We believe that as the technical selling comes to an end, global fund managers may be increasingly attracted by the hardcore strengths of South Korean and Taiwanese tech companies and the value-for-money after the pullback in valuations." For international new money that currently has almost no or completely no allocation of South Korean assets, this "golden pit" created by the rules may be the best entry opportunity. Konrad also pointed out that from a supply-demand perspective, the current memory market is undersupplied, Samsung has indicated that the supply-demand situation in 2027 will be more tense than in 2026, and NAND and DRAM prices are likely to continue to rise. The duration of the AI boom cycle is likely to be much longer than many people expect. Analysts point out that in the context of the continuous escalation of the global AI computing power race, the importance of HBM, advanced storage, and AI server supply chains is rapidly increasing. Although fund rebalancing may suppress stock price volatility in the short term, the demand for allocations to leading Asian tech companies remains strong in the medium to long term. For the South Korean market, on one hand, there is the wealth effect created by the AI bull market, and on the other hand, there is the liquidity pressure brought by institutional deleveraging. This selling frenzy triggered by "rising prices itself" is becoming a new phenomenon in the global capital markets in the AI era.