Box Range in Korean Stock Market... "Focus on KOSDAQ in Short Term, KOSPI After Year-End"

Manufacturing Sector Highlighted on KOSDAQ Amid Supply Chain and Inflation Concerns
Focus on KOSPI Price Merit as Macroeconomic Recovery Expectations Grow

On the 12th, the KOSPI index is displayed in the dealing room of the Myeongdong Hana Bank headquarters in Jung-gu, Seoul. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The KOSPI market continues to experience a stagnant 'box range' phase. This is attributed to the ongoing external factors such as supply chain uncertainties, inflation concerns, and rising interest rates, which have dampened investment sentiment in the manufacturing sector that once accounted for up to 70% of the market. While KOSDAQ, with its relatively lower manufacturing sector weight, may serve as a short-term alternative, the price advantage of the KOSPI market is expected to become more prominent as expectations for macroeconomic improvements after the year-end are reflected.

On the 13th, Shinhan Financial Investment made this forecast regarding the domestic stock market. Unlike the upward trends in the US stock market and cryptocurrency market, the KOSPI has remained sluggish. Large manufacturing stocks have been directly hit by supply chain uncertainties and concerns over China's economic slowdown. Interest rate hikes have also been a burden. Leveraged investments have been directly affected, and with government bond yields surpassing expected dividend yields, the attractiveness of stock dividends has diminished.

Individual investors are also leaving the KOSPI market. According to the Korea Exchange, from September until the day before, the total purchase amount by individuals in KOSDAQ was 446.0117 trillion won, surpassing KOSPI's 362.2841 trillion won. This shift is interpreted as a move of interest from manufacturing, which is directly affected by supply chain disruptions and inflation, to secondary battery materials, media, and gaming sectors, which are less influenced by macroeconomic factors. In fact, while the manufacturing sector still accounts for the mid-60% range in KOSPI, it makes up about 40% in KOSDAQ.

However, the KOSDAQ index itself has remained between 980 and 1011 for nearly a month. Yujun Choi, a researcher at Shinhan Financial Investment, explained, "Recently, prices have been rapidly changing mainly in media, secondary batteries, and IT sectors, which have been strong." He added, "The rotation cycle of themes is shortening and price volatility is increasing, so it is a time to hold the bat short and be cautious of volatility."

There are also burdensome factors. One is the valuation level. The price-to-earnings ratio (PER) premium of KOSDAQ compared to KOSPI reaches 80%, similar to the early 2019 level when the biotech sector accounted for 30%. Researcher Choi pointed out, "Although sector concentration has improved compared to then, it is difficult to be completely free from macroeconomic uncertainties. Given the high inflation pressure confirmed in the October inflation indicators, the possibility of increased volatility must be considered."

Increased stock supply is also a burden. Compared to the past, stock prices have risen, leading to increased fundraising through the stock market. This year, stock supply in KOSDAQ has increased by about 11 trillion won cumulatively. The amount of mezzanine issuance, which is a source of future stock supply, has increased by 52% compared to the previous year. Researcher Choi said, "This seems to be partly due to the mandatory adjustment of the conversion price of convertible bonds starting next month." He added, "Mezzanine usually allows exercising stock conversion rights one year after issuance, so it could become a supply-demand burden in the future."

Until the end of the year, KOSDAQ is expected to continue attracting attention due to ongoing manufacturing supply chain disruptions and inflation concerns. Seasonally, energy demand is strong, and China is maintaining strict quarantine and environmental regulations ahead of the Winter Olympics. There is also some time before the increase in convertible bond issuance becomes a supply-demand burden.

On the other hand, once expectations for macroeconomic improvements begin to be reflected, the price merit of KOSPI is expected to stand out. Researcher Choi advised, "A shift to large-cap stocks can be expected in the first half of next year." He added, "KOSPI has undergone significant price adjustments and is maintaining a sideways trend, so it is necessary to consider increasing the KOSPI weighting toward the year-end."

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