[Good Morning Stock Market] "Foreigners' Concentrated Net Buying in Electric and Electronics Is a Mid-Term Peak Pattern"

[Asia Economy Reporter Eunmo Koo] Recently, foreign investors have been showing buying momentum centered on the electrical and electronics sector in the KOSPI market. While it might be expected that foreign buying will become full-fledged, analysis suggests that the pattern of foreign investors making large-scale net purchases with a concentration in the electrical and electronics sector mainly appears near medium-term peaks. Meanwhile, attention should be paid to the fact that, despite the continued rise of Samsung Electronics, there have often been discrepancies in performance between the leading stock and small- and mid-cap stocks.

◆Jung In-ji, Yuanta Securities Researcher=Foreign buying momentum is flowing into the KOSPI market. Foreign investors have recorded net purchases for four consecutive days recently, with buying mainly concentrated in the electrical and electronics sector. Two days ago, foreign investors made net purchases totaling 1.3 trillion KRW, the largest scale since September 12, 2014, of which 1.1202 trillion KRW was net purchases in the electrical and electronics sector.

When foreign investors form large-scale buying momentum, it might be expected that foreign buying will become full-fledged, but in reality, it is somewhat different. Since the 2008 financial crisis, cases where foreign investors made daily net purchases exceeding 500 billion KRW and more than 80% of the net purchase amount was targeted at the electrical and electronics sector first appeared on March 13, 2018, and have occurred seven times so far. Although short-term rises sometimes followed, this pattern generally appears near medium-term peaks. Generally, when foreign investors’ large-scale net purchases show the electrical and electronics sector’s weight similar to its market capitalization weight, it can be seen as buying momentum spreading across the market, but if not, it is difficult to regard it as full-fledged buying of the Korean market.

Meanwhile, in the KOSPI200 futures market, foreign investors have cumulatively formed buying momentum but trade with a passive buying perspective, buying for 3 to 5 days and then selling all at once during short-term adjustments. Therefore, it is judged that the full-scale inflow of foreign demand still needs confirmation.

◆Lee Jin-woo, Meritz Securities Researcher=There is a ‘butterfly effect’ in the stock market as well. Unexpected results can occur even without intention. This is especially true when the movements of Samsung Electronics, the largest market capitalization company, become significant. When market attention focuses on the leading stock, relatively neglected companies can emerge. Small- and mid-cap stocks are representative of this.

SAMSUNG Electronics and small- and mid-cap stocks have often shown discrepancies in performance. When Samsung Electronics leads the market, small- and mid-cap stocks tend to underperform, while in the opposite case, the strength of small- and mid-cap stocks stands out. Behind the differentiated strength of small- and mid-cap stocks around 2005?2006 and 2015 was the stagnation of Samsung Electronics’ stock price. The strong performance of mega-cap stocks paradoxically caused the relative underperformance of small- and mid-cap stocks. This means that even if only short-term, consideration of size style (large-cap vs. small- and mid-cap) is necessary. If style is seen as a game of relative value.

It is difficult to predict how long the net buying trend of Samsung Electronics led by foreign investors will continue. However, looking at the background of the net purchases, it can be seen that there is strong correlation with foundry companies such as TSMC. Recently, the gap between TSMC’s stock performance and Samsung Electronics was a period when the gap greatly expanded, and from the perspective of stock price and earnings synchronization, Samsung Electronics’ relative attractiveness can be seen as high. Based on the 12-month forward price-to-earnings ratio (PER), TSMC is at 23.2 times, and Samsung Electronics is at 12.6 times, with the valuation gap widening again.

Even if it is not simply a problem of Samsung Electronics, the differentiated outperformance of small- and mid-cap stocks compared to large-cap stocks seems to be at a pause. This is because the relative performance and proxy between large-cap and small- and mid-cap stocks are positioned at an inflection point.

Looking at the 1-year and 3-month cumulative performance gap between large-cap stocks (KOSPI200) and small- and mid-cap stocks (KOSDAQ), the concentration in small- and mid-cap stocks is approaching and passing a critical point formed since 2003. Empirically, when the cumulative performance gap between these groups turns a turning point, it has often been accompanied by a style change. The return of the leading stock is welcome from a market perspective but also means that from a style perspective, preparation for change (possibility of large-cap outperformance) is necessary.

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