As short selling trades are set to resume in the domestic stock market for the first time in 1 year and 5 months, forecasts suggest that the activation effect of stock trading will be more pronounced in the KOSDAQ market than in the KOSPI market. Short selling involves borrowing shares from others to place a sell order, aiming for capital gains when the stock price is expected to fall.
Bae Cheol-kyo, an analyst at NH Investment & Securities, noted this in a report on the 'Market Impact Assessment of Short Selling Resumption' released on the 13th. Financial authorities plan to reorganize the computer system and regulations and will lift the ban on short selling starting on March 31.
Analyst Bae highlighted that the resumption of short selling could expand foreign investors' participation in the Korean stock market. This is because foreigners can employ hedge strategies to avoid the risk of declining stock prices through short selling. During the previous periods when short selling was banned—from October 2008 to May 2009, August 2011 to September 2011, and March 2020 to April 2021—foreign trading volume decreased, but showed a rising trend after the resumption of short selling.
In particular, analyst Bae predicted that foreigners are likely to return to the KOSDAQ market and increase transactions. When short selling is banned, foreigners can resort to hedge strategies through individual stock futures and options as an alternative. Comparing the three months before and after the ban on short selling in November 2023, the trading volume of futures increased more than twofold. However, only about 50 stocks are available for futures trading in the KOSDAQ market. This indicates that it was difficult for foreigners to participate in the KOSDAQ market during the ban on short selling.
Analyst Bae stated, "The KOSDAQ market has limited hedge strategies through futures trading," and added that "the activation of transactions following the resumption of short selling may manifest more strongly in the KOSDAQ market."
Bae also pointed out that, unlike the past periods when the KOSDAQ index outperformed the KOSPI index during short selling bans, the current situation is that the ratio is at -13% to 12%. This is seen as a positive factor since the activation of transactions after the resumption of short selling could positively influence the KOSDAQ index.
However, analyst Bae warned that "it is important to take note of industries where valuations have increased during the ban on short selling," and noted that "corporate values may be high but earnings outlooks are not favorable in sectors such as robotics and chemicals."
Analyst Bae cautioned that special attention should be given to stocks that have experienced significant increases in the price-earnings ratio (PER—market capitalization ÷ net income) without individual stock futures. These include Bumhan Fuel Cell, VINATech, NEXON GAMES, LS Marine Solution, KINX, i3system, and Chemtronics.