End of the Bull Market? Heated Small and Mid-Cap Stocks, Cooling Large-Cap Stocks

Foreigners' Net Buying Weakens, KOSPI in a Box Range
"Difficult to Find Strong Short-Term Direction in Large-Cap Stocks"

[Asia Economy Reporter Minji Lee] It is time for mid- and small-cap stocks. While large-cap stocks showed a sharp rise last month, this month has seen a notable uptrend in mid- and small-cap stocks, including the KOSDAQ index. When corporate profits stagnate and growth slows, a stock market environment favoring mid- and small-cap stocks typically emerges. Securities experts predict that, given ongoing concerns about tightening, there is no clear catalyst to change the index direction, making it difficult for large-cap stocks to gain momentum in the near term.

KOSDAQ Index Rises 5.13% Since the Beginning of This Month

According to the Korea Exchange, from the 1st to the 22nd of this month, the KOSPI fell by 0.31%. In contrast, the KOSDAQ index rose by 5.13%, outperforming the KOSPI's growth rate. Among KOSPI stocks, small-cap stocks (1.7%) performed better than large-cap stocks (-0.5%). This contrasts with the past month when foreigners swept up domestic stocks, leading KOSPI large-cap stocks (9.03%) to outperform KOSPI mid-cap (5.58%) and small-cap stocks (6.32%).

The biggest reason is the disrupted supply and demand for large-cap stocks due to weakening expectations for a soft economic landing and the end of the U.S. Federal Reserve's tightening. Earlier this year, the market highlighted 'disinflation,' raising hopes for the end of rate hikes and even rate cuts. However, stronger-than-expected U.S. employment data and the January Consumer Price Index (CPI) rekindled fears of tightening. Additionally, poor domestic export indicators have led to forecasts of a trade deficit for the second consecutive year, dampening investment sentiment across risk assets.

As catalysts disappeared, the buying spree by foreigners that had driven large-cap stock gains also shrank. Foreigners, who purchased KOSPI stocks worth 6.5 trillion won last month, have only bought stocks worth 1.33 trillion won this month. By stock, foreigners bought top semiconductor market cap stocks such as Samsung Electronics (2.2 trillion won) and SK Hynix (632.2 billion won) last month, but some profit-taking occurred this month. Since February 13th last week until the day before, foreigners sold SK Hynix stocks worth 132 billion won.

Among mid- and small-cap stocks, the secondary battery materials sector attracted attention. While individual and institutional stock purchases slowed in the KOSDAQ market, foreigners accumulated stocks worth 650 billion won this month, more than last month's 180 billion won. The top three net purchase stocks were EcoPro BM (341.3 billion won), EcoPro (217.9 billion won), and L&F (145.2 billion won), respectively.

As the stock-specific market continued, some Special Purpose Acquisition Companies (SPACs) showed abnormal sharp rises. Since the beginning of this month, Daishin Balance No. 10 SPAC rose 51.34%, Hana Financial No. 19 SPAC (36.7%), SK Securities No. 7 SPAC (36.3%), and Kyobo No. 10 SPAC (29.79%) also showed upward trends. Since these companies are established to acquire and merge unlisted companies, some investors buy in anticipation of listing. However, based on experience, in a stock-specific market without clear leading stocks, SPAC stocks can rise excessively on small supply and demand changes, so caution is needed regarding volatility.

"Need to Confirm Interest Rate Direction"

Experts unanimously agree that it will be difficult for large-cap stocks to gain strength in the near term. The minutes of the February U.S. Federal Open Market Committee (FOMC) reaffirmed the intention to raise the benchmark interest rate. While U.S. employment data and the mid-March FOMC results need to be checked, the current market expects the Federal Reserve to maintain a prolonged tightening stance. China's reopening could also have a negative effect by stimulating commodity price increases and pushing inflation higher, making it harder to cut benchmark interest rates. The won-dollar exchange rate surged from the low 1,200 won range at the beginning of this month to around 1,300 won, adding pressure on the Bank of Korea.

Researcher Changmin Cho of Yuanta Securities explained, "There are many factors to confirm before the KOSPI can rise, including short-term exchange rate volatility expansion," adding, "As we pass the Q4 earnings season, earnings forecasts have become less reliable, so it will be difficult for the KOSPI to show strong directional movement for the time being." Ji-young Han, a researcher at Kiwoom Securities, analyzed, "Considering foreign capital outflows and inflation concerns, it is difficult for the Bank of Korea to cut rates before the Fed," and added, "Concerns about corporate credit risk and economic recession are also growing, making it hard to find factors that would stimulate foreign investment."

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