Government's Revitalization Will: "Next Year, KOSDAQ Over KOSPI"... No More Passing Over

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] Next year, the prevailing outlook is that KOSDAQ will have a relative advantage over KOSPI and will show a strong performance. With the government's strong will to revitalize the KOSDAQ market, a favorable environment through institutional improvements is expected to alleviate the phenomenon of neglect. Furthermore, assuming the traditional characteristic that KOSDAQ outperforms KOSPI during periods when South Korea's export growth rate slows down, a strong KOSDAQ performance in the first half of next year is highly likely.

According to the financial investment industry on the 5th, the amendment to the "Regulations on the Issuance and Disclosure of Securities," aimed at enhancing the soundness of the convertible bond market, will take effect from December 1, and it is expected that the convertible bond issuance risk, which had been a burden on KOSDAQ, will be alleviated.

Hainhwan KB Securities researcher said, "Since it is not applied retroactively, there is demand to issue convertible bonds in advance before the regulations are enforced, so convertible bond issuance will increase in November in the short term, but a different trend will appear from December," emphasizing, "The convertible bond risk that had been a burden on KOSDAQ and the IT and healthcare sectors within KOSDAQ will be resolved." He added, "However, the concern that the regulation may lead to difficulties in fundraising for some companies is a risk that needs to be considered (unlike the preliminary plan that intended to apply the regulation regardless of public or private placement, it has been changed to apply only to private placements)." Considering this, he expected that "within KOSDAQ, large-cap stocks will show a stronger trend than small-cap stocks, and the sectors of interest are IT and healthcare, where convertible bond issuance risk will be alleviated."

The government's will to revitalize the KOSDAQ market goes further. Following the Ministry of Economy and Finance's announcement in its 2021 work plan in January about "diversifying the domestic stock investment scope of pension funds, etc.," the Korea Exchange plans to develop a KOSDAQ-related index targeting early next year. "Diversifying the domestic stock investment scope" means diversifying portfolios that had been concentrated on KOSPI, which essentially indicates the government's will to revitalize the KOSDAQ market. The new KOSDAQ index under development will select the top 5% of excellent companies listed on KOSDAQ and create a new index for special management, aiming to resolve the neglect phenomenon in KOSDAQ. In terms of the number of companies, about 70 to 80 companies are expected to receive special management, which is anticipated to attract inflows of funds from foreign and institutional investors.

A financial investment industry official said, "If government policies on the KOSDAQ market become more concrete, pension fund inflows can be expected primarily, and it is also possible to consider the inflow of funds from other supply entities due to the effects of government policies."

Domestic and international factors also seem to create a favorable environment for KOSDAQ. Typically, during periods when South Korea's export "growth rate slows," KOSDAQ tends to outperform KOSPI. Although export amounts are expected to increase in 2022 as well, the outlook is predominantly that the export growth rate slowdown is inevitable. Considering that the export growth rate exceeded 40% in the first half of 2021, the slowdown in export growth rate due to the base effect is likely to be prominent in the first half of 2022.

KB Securities emphasized, "The strong trend of KOSDAQ compared to KOSPI, which has been ongoing since the second half of 2021, is expected to continue until the first half of 2022, and especially, KOSDAQ, which had been underperforming compared to WMI500 small and mid-cap stocks (including KOSPI small and mid-cap stocks) until recently, is expected to show a relatively superior trend in 2022."

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