Investors in South Korea are betting on improving earnings and a recovery in global semiconductor sales to drive stock gains as they focus on long-term catalysts rather than this month’s surprise short-selling ban.
Global funds have started buying the nation’s equities again after three months of net sales, while Korean exports rose in October for the first time this year. The market’s decline over the August-October period provides a good entry point given chip earnings are likely to rise, according to Invesco Asset Management. Bloomberg Intelligence says demand for semiconductors and other tech hardware will reach an inflection point next year.
“There are quite a few reasons why investors may want to be overweight Korean equities heading into 2024,” said David Chao, a strategist for Asia Pacific ex-Japan at Invesco in Singapore. “Improving semiconductor fundamentals driven by an export and earnings recovery should provide a boost,” he said, adding that he also likes other exporters such as IT hardware, auto parts and industrials that could benefit in the second half of next year when the global economy is expected to fare better.
Volatility spiked this week as South Korea’s regulator on Nov. 5 announced a full ban on short selling until the end of June 2024. The move followed repeated complaints by the legions of local retail investors against the practice of selling borrowed shares, and came just months before general elections for the National Assembly in April.
While the decision sent stocks soaring the next day amid a bout of short-covering, it spurred concerns about Korea’s appeal for global hedge funds and banks that regularly deploy short trades in the $1.7 trillion market. The move is also seen complicating the nation’s bid to seek a developed-market status in MSCI Inc.’s indexes.
Still, to some observers the prohibition is unlikely to alter longer-term expectations for the country’s equities, especially as short selling accounts for a tiny portion of the market — about 0.6% of the benchmark Kospi Index’s value, according to exchange data.
“For investors who are attracted to Korea because of either the broader economic fundamentals or the fundamentals of specific stocks, I don’t think it’s going to be a major factor,” said Steven Schoenfeld, chief executive at MarketVector in New York. “On the margin, it will be a small negative.”
Earnings, Flows
The Kospi has gained almost 6% in November following a three-month losing streak that was triggered in part by global worries over higher-for-longer interest rates. The index is up 7.8% this year, while MSCI’s broader Asia gauge is little changed.
Overseas investors have bought $1.6 billion of Korean stocks so far this month, the most after Taiwan in a cohort of Asian emerging markets excluding China. They offloaded a combined $4.8 billion over the previous three months.
Funds are particularly bullish on Samsung Electronics Co. and SK Hynix Inc., Korea’s two-largest chip exporters that carry a combined weighting of more than 25% on the Kospi. They are the two most-bought stocks by foreigners on the index in November, with total purchases of more than 1 trillion won ($759 million) on a net basis.
Both companies beat analysts’ forecasts in their third-quarter results released last month and flagged the worst may be behind them.
Overall, the 12-month forward consensus earnings estimate for Kospi companies has climbed to the highest level in a year amid optimism that chip prices have bottomed out and global technology demand is recovering. The current reading implies a more than 50% year-on-year growth in profit, according to data compiled by Bloomberg.
“This expected jump in earnings has kept valuations relatively low despite the index grinding higher,” said Marvin Chen, a strategist at Bloomberg Intelligence in Hong Kong. “Korea has been one of the better performing major EM markets this year and could continue to maintain its relative outperformance into 2024.”
READ: Korea Short-Sale Ban Leads to Surge in Bullish Bets on Kospi 200