Year-End 'Passive Market' Followed by Early-Year 'Stock-Specific Market' Approaches

Major Shareholders Avoid Requirements by Selling Individually
Passive Inflows from Institutions and Foreigners Buying

[Asia Economy Reporter Ji Yeon-jin] In December, passive funds from institutions and foreigners flowed in, while individual investors repeatedly sold stocks to avoid the 'major shareholder requirement' subject to capital gains tax. At the beginning of the year, the opposite trend was observed, with institutions and foreigners turning to net selling and individuals engaging in net buying, resulting in a stock-specific market trend.

According to an analysis by Hana Financial Investment on December KOSPI investment flows by investor type from 2018 to this year, the average net buying amounts for institutions and foreigners were approximately 1 trillion KRW and 200 billion KRW, respectively. In contrast, individuals averaged net sales of 1.4 trillion KRW. Institutions and foreigners showed a net buying trend for year-end benchmark replication, dividend investment, and short-covering (buying stocks to repay short sales), while individuals sold stocks to avoid the capital gains tax major shareholder requirement.

However, at the beginning of the year, individuals switched to net buying, while foreigners and institutions sold. In January, institutions recorded an average net sale of 6 trillion KRW, foreigners 300 billion KRW, and individuals showed net purchases of 5.4 trillion KRW. In February and March, foreigners and institutions continued to withdraw funds from the stock market, while individuals expanded their net buying. Lee Kyung-soo, a researcher at Hana Financial Investment, explained, "Investment entities with a large share of passive funds, such as institutions and foreigners, tend to flow in only in December and steadily flow out from January to March. Conversely, individuals, who focus on stock-specific plays, show outflows in December and strong net buying in the first quarter of the following year."

Considering only the supply and demand by investor type, it is possible to predict that large-cap and value stocks favored by passive funds perform well every December, while individual stocks show strength at the beginning of the year. In fact, based on weekly factor returns from 2010 to recent years, factors such as upward earnings revisions, target price increases, and overheated stock prices performed well during periods of individual buying. When institutions and foreigners bought KOSPI stocks, factors like excessive price declines, undervaluation, and high dividends showed strong performance. The researcher added, "Considering the sharp downward adjustment in KOSPI earnings expected next year, the seasonality at the beginning of the year is likely to be even stronger. Stocks with high earnings growth next year, which have played a leading role but recently plunged due to year-end seasonality, form a good portfolio for bottom fishing (a low-price buying investment strategy) from this point onward."

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