Even Squid Game Can’t Save South Korean Stocks

Even Squid Game Can’t Save South Korean Stocks
Carl Hazeley

over 2 years ago4 mins

  • South Korean stocks have been among the world’s best-performing, thanks to low rates, high retail investor participation, global chip shortages, and cheap valuations.

  • That reversed in July this year, with rates rising, retail investor participation dropping off, chip shortages running out of steam, and valuations looking less attractive.

  • But there’s still time to reduce your exposure to Korean stocks before they take a further nosedive.

South Korean stocks have been among the world’s best-performing, thanks to low rates, high retail investor participation, global chip shortages, and cheap valuations.

That reversed in July this year, with rates rising, retail investor participation dropping off, chip shortages running out of steam, and valuations looking less attractive.

But there’s still time to reduce your exposure to Korean stocks before they take a further nosedive.

Mentioned in story

South Korea’s stock market index, the Kospi, climbed 50% between January 2020 and June 2021, according to the World Federation of Exchanges – an ascent that earned it the title of world’s second best-performing big stock market. But with the Kospi down about 9% in the second half of 2021, analysis from The Wall Street Journal suggests things aren’t getting better anytime soon…

Korean stocks versus major indexes, rebased.
Korean stocks versus major indexes, rebased.

What drove the rally in South Korean stocks?

  • South Korea’s low interest rates sent the cost and risk of borrowing money to invest tumbling, encouraging more risk-taking.

  • Korean households received stimulus checks at the height of the pandemic, which they then piled into stocks like South Korea’s answer to GameStop, as well as recent winners from the success of Netflix’s Squid Game.

  • Institutional investors were betting big on South Korea’s stocks too, because stock prices appeared cheap on a global scale relative to their forecasted earnings.

  • There’s a global shortage of microchips, and South Korea is home to some of the world’s biggest chipmakers. And given that the shortage has helped drive record earnings for some of them, investors have been pushing up their share prices and, by extension, Korea’s stock market index.

And why has the rally stopped?

  • South Korea is one of few countries out there that’s hiked interest rates from pandemic lows, making it more expensive to borrow money. That means investors are less likely to want to take risks with their borrowed money – by, say, investing in stocks.

  • Bond yields on government bonds around the world have risen, and they have in South Korea too. If investors can get a higher return from low-risk bonds than they could before, they’ll be more inclined to free up some cash to invest in them by selling riskier stocks.

  • Korea’s household debt is high compared to the size of the economy. So in October, the country’s government introduced measures to limit that debt. By making it harder to borrow and harder still to borrow large sums, South Korea reduced one source of funds for once-enthusiastic stock market retail investors. Analysts reckon tougher borrowing restrictions will temper stock margin lending as a result, and therefore remove a key element that’s been driving record levels of retail investor trading.

  • Some investors are worried that South Korea’s cheap-looking stocks are now overvalued. Couple that with concerns that the worst of the chip shortage is past and that memory chip prices in particular are starting to fall, and it follows that institutional investors home and abroad have been selling their Korean stocks and taking their profits.

What does that mean if you’re invested?

Well, there’s good news and there’s bad news.

The bad news is that professional institutional investors are already wise to what’s going on in South Korea. In fact, international institutional investors have been selling precisely when individual retail investors have been buying. And as government crackdowns reduce retail investors’ ability to borrow, there are likely fewer potential buyers out there to offset any more selling.

Foreign investor versus individual investors’ net buying/selling.
Foreign investor versus individual investors’ net buying/selling.

South Korean stocks could weigh on investors’ international portfolios, especially those focused on emerging markets (looking at you, Walton family). They’ll also put pressure on global investors who have bet big on chipmakers, with Samsung Electronics a particularly popular pick right now. It’s the biggest company in the Kospi and one of the biggest in the MSCI Emerging Markets Index, and it’s down 12% so far this year.

The good news is that Invesco’s Asian strategist expects South Korean stocks to remain under pressure for a while yet. If the investment firm is right, there may still be time to reduce your exposure or get your cash out altogether. Samsung’s earnings are unlikely to take an immediate tumble, after all, and selling shouldn’t prove too much of a challenge since there are still lots of retail investors buying into Korean stocks right now.

It’s simply a case of reducing your bets on big Korean chipmakers where you have them, and taking profits where you can, if not following your trading plan. The same applies if you’re directly invested in the Korean index or heavily in emerging market or Asia-focused funds. Consider yourself warned...

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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