Investors rediscover the Kosdaq

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Investors rediscover the Kosdaq


Korea’s secondary stock trading board, the Kosdaq, hit record levels of market capitalization for three consecutive days thanks to a flight from the main bourse due to worse-than-expected performances of large conglomerates and rising interest by retail investors.

On Jan. 23, the Kosdaq closed at 589.31, marking the highest-ever in six years and seven months. That was the second highest record since it hit 590.19 on June 30, 2008.

The secondary index continued rallying making new records on Jan. 21 and 22. For the first 23 days of the 2015, the tech-heavy market jumped 6.24 percent from the end of last year, while the benchmark Kospi inched up a mere 0.5 percent.

On Jan. 21, the total market capitalization of the tech-heavy market reached 154.2 trillion won ($143.2 billion). The following day, the figure climbed to 154.8 trillion won, and then 156.1 trillion won on Jan. 23. Each day was an all-time high since the market’s creation in 1996.

The growth of the Kosdaq has been remarkable in recent years as an increasing number of retail investors are making investments with borrowed money in Kosdaq-listed businesses. Both the index figure and trading volume of the market are on the rise.

According to the Korea Financial Investment Association, the Kosdaq’s credit balance marked 2.7 trillion won, surpassing that of the benchmark index Kospi. This means that more money is being borrowed to buy shares on the Kosdaq than on the Kospi.

The average values of shares traded daily surged more than 35 percent to 2.72 trillion won as of January compared to a year earlier. The average trading volume of shares stood at 461 million shares, up 30.1 percent during the same period.

Due to worries about a global slowdown, the economic prospects of major economies are gloomy except for the United States. Investors are also concerned about Korea’s slowdown, and that has been reflected in the Kospi, where large-cap shares, such as Samsung Electronics and Hyundai Motor, are showing sluggish movement as the index hovers around the 1,900 mark.

But the Kosdaq’s small cap shares are doing great. The global economy’s slid into a protracted slowdown, with international oil prices plunging and foreign exchange rates fluctuating, will hurt Korean conglomerates, which largely rely on exports. Investors are shunning those large companies for investment, analysts say, and looking to their smaller brothers.

For the last two to three years, the Kosdaq enjoyed unsolicited gains as large businesses’ performances worsened, said Lee Chang-mok, head of NH Investment & Securities’ research center.

Hyundai Motor’s stock price dropped after its performance announcement on Jan. 22. The nation’s largest automaker posted 1.88 trillion won in operating profit in the fourth quarter, lower than market expectations of 1.9 trillion won.

Turning to smaller shares has been a natural trend in investors’ decision-making, said Kim Yong-gu, a researcher at Samsung Securities. Kim cited several external factors that have boosted the trend: a halted recovery of advanced economies, higher volatility in foreign exchange rates, falling oil prices and risks of oil producers. Kim also mentioned that government policies aren’t as effective as expected, while large companies’ disappointing earnings have changed investors’ appetites.

“Land mines are everywhere, so investors are taking byroads instead of main streets,” Kim said. “I think it’s a reasonable tactic for investment.”

Some analysts pointed to Korea’s changing industrial structure as a major factor.

The main pillars of the economy are now changing from steel-making, shipbuilding and chemical industries to biotechnology, healthcare and the cultural content businesses that are on the Kosdaq, said Kim Jae-joon, head of the Kosdaq index at Korea Exchange. As more than 70 businesses went public on the Kosdaq last year, the market gained growth momentum.

Experts are divided on whether the Kosdaq’s good fortune will last.

Kosdaq shares can be alternatives to large-cap shares for the time being as there are high external uncertainties, said Lee Kyung-min, researcher at Daishin Securities.

At the beginning of every year, the Kosdaq market tends to react immediately to the government’s new policies, said Seo Dong-pil, a researcher at IBK Investment & Securities. There can be some ups and downs but it will easily reach 600 in the coming months.

Sluggish performances of conglomerates might affect the Kosdaq, too, said Lee Jong-woo, head of IM Investment & Securities research center. Investments temporarily flocked to small-cap shares, but the Kosdaq lacks fundamentals that can maintain the current growth pace.

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