Citi: Investor Sentiment Improves for China Stocks, Worsens for KOSPI

Investor positioning in Chinese equities has improved significantly, driven by short covering, while bearish sentiment has intensified for South Korean and Japanese markets, according to a new analysis from Citi. The divergence highlights a shifting risk appetite among investors in major Asian markets.

China Sentiment Shifts on Short Covering

Positioning in both the China A50 and Hang Seng indices saw a "meaningful improvement," with sentiment moving toward bullish territory, Citi reported. This shift was primarily attributed to short covering, where investors who had bet against the market buy back shares to close their positions.

The bank's analysts noted that this represents a "notable change in sentiment" toward Chinese equities, suggesting that the recent pessimism may be starting to ease.

Bearish Bets Mount on KOSPI and Nikkei

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In contrast, bearish flows intensified for South Korea's KOSPI and Japan's Nikkei indices. According to Citi, this was driven mainly by investors initiating new short positions, indicating a more negative outlook for these markets.

Citi's report singled out the South Korean market as appearing particularly "fragile." While overall notional exposure has declined, making the headline positioning seem more neutral, many existing long positions are reportedly deeply in loss.

This underlying weakness raises concerns about potential forced selling. The firm warned that capitulation risk could increase further if the market weakness in South Korea continues, potentially leading to a sharper downturn as long-term holders are forced to sell.