Traders Wager on Asia’s Tech Titans for Global Stocks Rally Boost
With the attention shifting from the Iran war, both investors and strategists are seeking the next opportunity for growth in equities. Many are looking towards Asia. Shares in South Korea and Taiwan have experienced the most significant rally globally this month, with the Kospi index soaring 78 percent year-to-date. The two markets have emerged as significant beneficiaries of the excitement surrounding artificial intelligence, driven by the increasing influence of major players such as Samsung Electronics Co., SK Hynix Inc., and Taiwan Semiconductor Manufacturing Co. Equity-derivatives strategists are increasingly advocating for trades that anticipate further gains, coinciding with traders pursuing the rally, which is driving up the cost of options. The outcome: Implied volatility for stocks in Taiwan and Korea is increasing in tandem with the performance of those markets. Currently, the Taiex and the Kospi 200 Index are hovering near peak levels compared to the S&P 500 Index, while the Cboe Volatility Index has fallen back below its one-year average. “The strength of the move is producing extreme reversals from prior trends,” said Jun Gyun. That’s establishing the “vol up, spot up” pattern, which may persist for “some time, until a period of consolidation emerges,” he added.
Tech and AI are making a significant comeback, overshadowing markets like India, which relies heavily on oil, has limited exposure to AI, and is grappling with a currency that is near a record low. The S&P BSE Sensex Index has declined by 9.3 percent this year, making it the second-worst performer globally. Korean shares have garnered such demand that Interactive Brokers Group Inc. has begun offering US retail investors direct access to the market. Meanwhile, the assets under management for leveraged exchange-traded funds have surged to a peak, and they’re likely to grow further as authorities have approved the local listing of those for single stocks. This is according to a recent report from JPMorgan Chase & Co., which noted that the products keep the risk of “flow-driven overshoots alive.” Jun from Samsung Securities perceives long-gamma strategies associated with increasing volatility as advantageous for Korean equities in the short term. Looking ahead three months or more, he states that traders ought to think about establishing short-gamma exposure in expectation of a volatility peak.
At Societe Generale SA, strategists observed that the 12-month variance spread between the Kospi 200 and S&P 500 has attained extreme levels. However, a significant turnaround would require a “more benign” oil and geopolitical landscape, along with a halt in the tech rally—conditions they do not anticipate occurring in a “orderly manner” at this time, as stated in their report, where they advised against positioning for this scenario. Meanwhile, JPMorgan strategists have recommended bullish structures on the iShares MSCI Emerging Markets ETF, anticipating that the equities will continue to outperform due to the AI theme, a more supportive macro backdrop, and strong fundamentals. As the summit between Presidents Donald Trump and Xi Jinping approaches, with AI policies expected to take center stage, investors have increased their bullish positioning in US-traded Chinese ETFs. They are actively purchasing call spreads on the iShares China Large-Cap ETF and calls on the KraneShares CSI China Internet ETF.
In a separate analysis, JPMorgan strategists, under the guidance of Tony Lee, recommended call spreads on the Taiex or worst-of calls on the Taiwanese gauge, the Kospi 200, and Japan’s Nikkei-225 Stock Average to capitalize on the AI hardware rally. “US large-cap tech, Korean memory and component suppliers, and Taiwan’s semiconductor ecosystem are all showing the same pattern — earnings delivery remains strongest where exposure to AI hardware bottlenecks is highest,” the strategists noted in their analysis. “Hardware remains the earnings backbone of the AI theme, and Taiwan remains its most efficient index level proxy.”
