The resumption of short selling is just 6 days away. The KOSPI 200 and KOSPI 150 stocks will resume after 17 months, and the resumption for all stocks is about 5 years. As the resumption of short selling approaches, tension prevails among investors. Expectations that trading will increase and the stock market will become more active coexist with concerns that stock price volatility will increase.
However, it is difficult to definitively say what specific impact the resumption of short selling will have on the KOSPI and KOSDAQ indices. Looking at past cases of short selling resumption, the index direction has not shown consistent patterns.
There are expectations that, although there may be temporary fluctuations in the domestic stock market, the influx of foreign investor funds will enhance market liquidity and efficiency. Lee Kyung-min from DAISHIN SECURITIES Research Institute noted, "Given the current low KOSPI valuation and price merits, there will be short-term fluctuations due to changes in supply and demand if short selling resumes," while also suggesting, "The KOSPI index is expected to attempt additional leveling up, primarily driven by net buying from foreign investors."
He also added, "Institutional investors operating long-short strategies are likely to expand their total positions, and the overall number of foreign investors participating in the market is expected to increase."
So, what should be examined before short selling begins? According to the securities industry, it is crucial to closely monitor the balances and stock price changes. Kim Dae-jun from Korean Investment & Securities Research Institute stated, "Typically, before short selling is implemented, the demand for borrowing stocks inevitably increases," and noted, "Proactive buying by stock lenders can quickly drive up prices. The stock price may continue to rise for the coming week."
It is also necessary to examine the borrowing balance ratio closely. Kim Dae-jun explained, "Based on past experience, if the borrowing balance ratio is above 3% compared to listed shares, the likelihood that borrowed stocks will be converted to short selling increases," adding, "If the borrowing balance ratio exceeds 5% and the 12-month forward earnings per share (EPS) growth rate is lower than the market or if the 12-month forward price-to-earnings ratio (PER) is significantly higher than the market average, caution is required." He advised that if the stocks held fall into such a situation, proactive selling before the implementation of short selling could be a favorable strategy to secure revenue.
Moreover, stocks that have risen significantly due to high valuations or short-term issues could become targets for short selling, leading to larger drops, so caution is necessary when investing in the current situation.
After short selling begins, what should be monitored? There are suggestions to increase the proportion of industries classified as safe zones and reduce exposure to risky ones. DAISHIN SECURITIES classified fundamentally undervalued sectors with significant declines as safe zones, including semiconductors, automobiles, secondary batteries, displays, retail, and utilities. In contrast, sectors that have significant valuation burdens and high or rapidly increasing borrowing balance ratios were classified as risky, such as trading, capital goods (defense), shipbuilding, machinery, IT electronics, chemicals, and healthcare.
Lee Kyung-min from Research Institute suggested, "It is effective to reduce the proportion of sectors like machinery, shipbuilding, IT electronics, software, media and education, and IT hardware before and after the resumption of short selling, while increasing the proportion of semiconductors, automobiles, and steel sectors."
Stocks with rapidly increasing borrowing balances may see price fluctuations in the next month, regardless of the sector. However, there are suggestions that it is necessary to consider a long-term strategy of attempting to buy undervalued stocks when prices have dropped.
Kim Dae-jun stated, "In an environment where low growth is prevalent like now, if growth potential can be demonstrated, it can induce inflow of funds. Particularly, even if short selling volume increases for such stocks, stock price rises may not cease, and there is potential for a short squeeze to be triggered," adding, "In other words, if there is long-term growth potential, strategies of increasing position while lowering purchase price should be considered even if short selling pressure occurs."