10.7 Trillion Injection into Supplementary Fund... Will the Stock Market Stabilize at '1% of Market Cap'?

[Asia Economy Reporters Koh Hyung-kwang and Park Ji-hwan] As the government plans to establish a 10.7 trillion won Securities Market Stabilization Fund (Sang-an Fund), attention is focused on whether the stock market, which has been on a rollercoaster ride due to the novel coronavirus disease (COVID-19) crisis, can regain stability. Market experts evaluated that considering the scale of this fund is just about 1% of the KOSPI market capitalization (approximately 1,000 trillion won), its actual impact on supply and demand will not be significant. However, since it demonstrates the government's commitment to market stabilization, it is expected to have a positive effect on improving investor sentiment.

According to the financial investment industry on the 25th, the government has decided to create a 10.7 trillion won market stabilization fund involving all financial sectors and securities-related institutions to expand the demand base of the stock market. To promote overall market stability, the fund will invest not in individual stocks but in index products representing the entire market, and will be actively operated starting next month.

With over 10 trillion won being sequentially injected into the stock market, it is expected to serve as a safety net to some extent even during a downturn. However, experts foresee that despite the overwhelming size compared to past cases, the actual effect on stabilizing market supply and demand will not be substantial.

This is the first time since 1990 that the government has established a large-scale stock market stabilization fund. At that time, a total of 627 companies, including securities firms and listed companies, raised 4.85 trillion won in a stabilization fund to support the sharply falling stock market. During the 2008 global financial crisis, a 500 billion won Sang-an Fund limited to the securities industry was established. When stock prices plunged due to the US-China trade war at the end of October 2018, a 500 billion won Sang-an Fund created by related institutions was injected into the KOSDAQ market. The current Sang-an Fund has a structure similar to the 5 trillion won stabilization fund the government invested in 1990 to boost stock prices. Notably, for the first time in about 30 years since 1990, five major financial holding companies?KB, Shinhan, Hana, Woori, and NH?and private financial firms representing each sector are participating.

The investment targets also differ from the past. The newly established Sang-an Fund is expected to invest not directly in individual stocks but in exchange-traded funds (ETFs) or index funds based on representative domestic stock indices such as 'KOSPI 200,' 'KOSDAQ 150,' and 'KRX 300.' By investing in indices rather than individual stocks, the aim is to protect investors and serve as a stabilizing force in the stock market.

In the 1990s, the stabilization fund focused on managing indices centered on stocks with significant market impact by investing in individual stocks. It mainly targeted large manufacturing stocks, financial stocks, and national stocks, which led to controversies over government intervention and even issues raised by the World Trade Organization (WTO). Hwang Se-woon, a researcher at the Capital Market Research Institute, explained, "It is reasonable for stabilization funds to follow an index-type approach that buys the entire market rather than individual stocks. Investing only in individual stocks can lead to various allegations of preferential treatment."

There are also criticisms that the Sang-an Fund appears limited in scale. The 10.7 trillion won is less than 1% of the KOSPI market capitalization (1,083 trillion won as of the previous day's close), so even if this fund is injected all at once, it would arithmetically lead to only about a 1% increase in the index. The Sang-an Fund amount to be invested in the domestic stock market next month is also about 3.7 trillion won at most. The remaining 7 trillion won will be decided based on market conditions. Jung Yong-taek, head of the IBK Investment & Securities Research Center, predicted, "The 10 trillion won Sang-an Fund alone will not have a significant effect on stabilizing market supply and demand. It may reduce some of the price declines but will not change the overall market trend."

There is also a perspective that the focus should be on the government's intention to stabilize the market rather than viewing the Sang-an Fund as a means to boost the stock market. Researcher Hwang said, "Artificial stock price boosting by the government should be avoided. A 10 trillion won Sang-an Fund is an appropriate scale for market stabilization measures." No Geun-chang, head of the Hyundai Motor Securities Research Center, also evaluated, "Although this fund may not be a strong force, it signifies the government's commitment to market stabilization."

This content was produced with the assistance of AI translation services.