Events Starting This September... "Focus on the Species That Change Nests Using the Snake's Head"

[Asia Economy Reporter Lee Seon-ae] The Korea Exchange (KRX) has decided to expand the regular changes of market capitalization-based stock indices (large-, mid-, and small-cap stocks), which were previously conducted once a year in March, to twice a year?on the day following the futures expiration dates in March and September. This change has heightened investor interest in individual stocks whose classification criteria will be altered. According to securities industry analysis that "the head of the snake (mid-cap stocks) is better than the tail of the dragon (large-cap stocks)," related stocks are expected to benefit from supply and demand dynamics, presenting investment opportunities.

According to the Korea Exchange on the 31st, the market capitalization-based index changes, which were conducted every March, will now also be implemented in September starting this year, with the scheduled index change date set for September 10.

In the KOSPI market, 'SK Bioscience' and 'SK IE Technology,' newly listed before June, will be newly included in the large-cap category. However, 'SD Biosensor,' 'KakaoBank,' and 'Krafton,' which were newly listed after June, cannot be included in the large-cap category. 'F&F,' which was spun off from F&F Holdings and could not be included in the large-cap category, may be newly included as a large-cap stock in the September regular change. Stocks currently classified as mid-cap such as 'Pan Ocean,' 'Hyosung TNC,' 'Hyundai AutoEver,' 'Meritz Securities,' 'CS Wind,' and 'Hyundai Mipo Dockyard' are likely to be reclassified as large-cap stocks.

Asset management firms adjust the composition weights of their funds according to index changes, so stocks classified as large-cap but ranked lower rarely benefit from supply and demand. Since large-cap index tracking funds mostly allocate their weights to other stocks, and there is also the KOSPI 200 index, which comprises 200 representative stocks of the Korean stock market, these stocks are relatively disadvantaged in terms of supply and demand. Thus, accumulated data shows that mid-cap stocks (the head of the snake) are preferable to large-cap stocks (the tail of the dragon).

Meritz Securities analyzed 12 Korea Exchange index change events from March 2010 to March this year and found that in 10 out of 12 cases, institutions net bought stocks moving from large-cap to mid-cap, whereas in all 12 cases, stocks moving from mid-cap to large-cap faced institutional selling pressure. Stocks downgraded from large-cap to mid-cap outperformed the KOSPI index in 8 out of 12 cases around two months before and after the index change, with an average excess return of 6.6 percentage points.

Among stocks newly included in the KOSPI mid-cap category, 'PI Advanced Materials' and 'MCNEX' are expected to be exceptions and included despite transferring from KOSDAQ to KOSPI after June. Newly listed stocks before June, such as 'Prestige BioPharma' and 'SoluM,' can also be included as mid-cap stocks. Some stocks have been downgraded from large-cap to mid-cap due to ranking drops. 'Daewoong' and 'Douzone Bizon' are expected to be reclassified as mid-cap due to decreased market capitalization.

Jeon Gyun, a researcher at Samsung Securities, stated, "Mid-cap stocks are mainly used as targets for active funds to attempt alpha generation, so it is necessary to pay attention to stocks newly included in the mid-cap category," adding, "Particularly, attention should be given to stocks that have risen from small-cap to mid-cap."

Stocks moving up from small-cap to mid-cap in the KOSPI market have significantly increased market capitalization, attracting attention from investors, especially active funds. 'Ilyeon Pharmaceutical,' 'SBS,' and 'Next Science' could move from small-cap in March to mid-cap in September.

Stocks newly included in the KOSPI small-cap category consist of newly listed stocks and those downgraded from mid-cap due to ranking drops. Since small-cap stocks are relatively less utilized as investment targets, trading demand for stocks included in the small-cap category is expected to be limited. 'LVMH Holdings' and 'Hwasung R&A' are expected to be newly included. 'Kyochon F&B,' 'District Heating Corporation,' and 'Aprogen Pharmaceuticals' are expected to be downgraded from mid-cap to small-cap.

In the KOSDAQ market, large-cap stocks are major stocks included in coverage for active management by pension funds and others. Newly listed stock 'Ecopro HN' is expected to be included. Stocks that have risen from mid-cap such as 'Nature Cell,' 'Dev Sisters,' 'Hana Materials,' and 'Pharma Research' are expected to move to large-cap.

If stocks are downgraded from large-cap to mid-cap in KOSDAQ, they may become targets for replacement trades within the coverage of asset management firms, potentially leading to sell-offs. Expected stocks include AhnLab, CIS, and CMG Pharmaceuticals. For stocks that have risen from small-cap to mid-cap in KOSDAQ, active funds may focus on those with potential for further rise to large-cap, so it is necessary to observe the background of their price increases.

Meanwhile, when investing around index change events, it is generally observed that expectations of improved supply and demand due to index inclusion are reflected in stock prices before inclusion, so investors should be cautious about timing. Lee Jung-yeon, a researcher at Meritz Securities, said, "Past data shows that a strategy of buying at least one month before the change is most advantageous, and I recommend buying before the index change date and selling on the change date."

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