May-June Securities Market Events 'MSCI·KOSPI200'... Short Selling Risk Weighing on Capital Inflow Effect

Capital Inflow Expected as Positive Factor... Caution Advised for Short Selling Targets and External Adverse Factors After Inclusion

[Asia Economy Reporters Seon-ae Lee and Myunghwan Lee] As the regular changes to the Morgan Stanley Capital International (MSCI) index in May and the KOSPI 200 index in June approach, investor interest in newly included stocks is rising. Since passive funds are expected to flow into the newly included stocks, this acts as a positive factor for stock prices. However, caution is required as the inflow effect can disappear if the stocks become targets of short selling or are exposed to various negative factors after inclusion.

According to the financial investment industry on the 30th, the MSCI regular change, an index calculated by the US investment bank Morgan Stanley, will be rebalanced on May 31. Among major global indices, it has the largest amount of tracking funds and thus a significant impact on the stock market. Stocks that securities firms have identified as likely to be newly included are KT and Hyundai Heavy Industries. Yuanta Securities predicted that if inclusion is successful, Hyundai Heavy Industries would see a net inflow of 153 billion KRW and KT 161.3 billion KRW.

In the June regular change of the KOSPI 200, six stocks are expected to be newly included and six stocks excluded. The rebalancing will take place on June 9. Securities firms expect F&F, SD Biosensor, Meritz Fire & Marine Insurance, Iljin Hi-Solus, K Car, and Hanil Cement to be likely included. On the other hand, Nexen Tire, SNT Motiv, SK Discovery, Bukwang Pharmaceutical, Youngjin Pharmaceutical, and Poongsan are expected to be excluded.

Stocks newly included in the index can receive support in their stock prices due to the inflow of global passive funds tracking the index, while excluded stocks may suffer from fund outflows. Experts advise that since there is a time gap between the announcement of newly included stocks and their actual inclusion in the index, proactively purchasing expected inclusion stocks can yield capital gains.

Hyol Hur, a researcher at NH Investment & Securities, stated, "When purchased three months before the regular change, the average excess return was about 15 percentage points," adding, "Even when purchased on the announcement day of the regular change, an excess return of about 7 percentage points was achieved."

However, investment caution is required. Recently, a paradoxical phenomenon has appeared where stocks excluded from the KOSPI 200 rise in price, while newly included stocks decline. This is because short selling and other external negative factors suppress the effect of fund inflows.

LG Energy Solution, which was specially newly included in the KOSPI 200, is a representative case. On the inclusion day, the 11th, LG Energy Solution closed at 391,000 KRW, down 6.35% from the previous trading day. The stock price declined as short selling was allowed upon inclusion. It was ranked first in short selling volume on the KOSPI that day. The short selling amount reached 263 billion KRW, accounting for 36.7% of the trading volume. The downward trend continued, and one week after inclusion on the 18th, the stock price fell 2.30% compared to the inclusion day.

This is interpreted as a result of partial allowance of short selling only for large-cap stocks such as the KOSPI 200 since May last year. Since short selling becomes possible the moment a stock enters the KOSPI 200 and is prohibited upon exclusion, it becomes a target of aggressive trading. Kyun Jeon, a researcher at Samsung Securities, pointed out, "Since short selling is possible simultaneously with KOSPI 200 inclusion, speculative trading demand can join in."

Earlier, Kakao Pay, which was specially newly included in the KOSPI 200 on December 10 last year, also traded down 6% at 196,000 KRW on the day. A week later, the decline deepened, trading at 177,000 KRW, down 14.88% compared to the 10th. This was due to the controversy over former Kakao Pay CEO Youngjun Ryu's 'eat-and-run' scandal. On the inclusion day, December 10, Ryu exercised stock options, becoming the center of criticism. Kakao Bank, which was specially included in the KOSPI 200 on September 9 last year, also fell 0.41% on the day. A week after inclusion, it fell 6.81%, with the decline widening. This was attributed to the negative impact on Kakao affiliates' stock prices due to Kakao's controversy over encroaching on local businesses at the time.

Nevertheless, the securities industry's positive view on the possibility of achieving returns when purchasing in advance remains. Researcher Hur emphasized, "Contrary to common belief, the excess performance of index change event strategies has not diminished recently," adding, "Index change events are a good opportunity to generate excess returns."

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