Hopes are growing that momentum is rotating out of semiconductors into other sectors in the recent stock market, but an analysis said it is closer to an optical illusion. As share prices of Samsung Electronics and SK hynix underwent a correction, other stocks only appeared relatively strong, and funds did not actually spread across the broader market, the explanation said.
On the 6th, Kim Jun-young, an analyst at iM Securities, said in a report, "The spread into neglected stocks is likely to be temporary," and predicted, "As earnings upgrades centered on semiconductors continue, concentration in the leading names will eventually reappear."
In fact, although expectations for rotation grew as Samsung Electronics and SK hynix underperformed the market since the end of last month, the analysis said this was not the result of funds exiting semiconductors and moving into other sectors.
Kim said, "While the S7 (Samsung Electronics, SK hynix, SK Square, Samsung Electronics(1P), Samsung Electro-Mechanics, Samsung Life Insurance, Samsung C&T) fell, the KOSPI market cap excluding the S7 virtually stayed put," adding, "On the surface it looked like a market of broadening gains, but rather than funds moving from top market-cap stocks into others, it was closer to an illusion caused by the outsized declines in Samsung Electronics and SK hynix due to an expansion of leveraged products."
He added, "It is not the case that flows exiting top names have been funneled into other stocks," and said, "Even if corrections occur in Samsung Electronics and SK hynix going forward, the warmth of rotation will not be significant."
In the end, the outlook is that funds are highly likely to refocus on sectors where earnings are improving.
Kim said, "Earnings upgrades centered on semiconductors ultimately suggests a renewed tilt toward the leaders," adding, "The more factors that shake the stock market, the more investors have no choice but to lean on the leading names."
However, he expected investing to become more difficult than before. While the rally in leading stocks will continue, volatility could expand significantly because there is not enough liquidity to support the market.
In fact, margin balances and investor deposits relative to market capitalization have fallen to pre-COVID-19 levels. Although the stock market has grown rapidly in size, it means that new liquidity to support it has not flowed in sufficiently.
Kim said, "Both the ratios of margin balances and deposits to market cap have fallen to the lowest levels in recent years," and analyzed, "Given the Bank of Korea's rate-hike stance and regulations on margin lending, it will not be easy for the domestic liquidity environment to improve in the short term."
He also pointed to the expansion of leveraged ETFs as a factor that amplifies volatility. Leveraged ETFs rebalance by buying and selling the underlying assets near the close each day to meet the target multiple, and in Korea, the size of this has grown to exceed the underlying assets' transaction value.
Kim explained, "Total assets of single-stock leveraged ETFs on SK hynix amount to $19.4 billion, more than four times the average daily transaction value ($4.5 billion)," adding, "Samsung Electronics likewise has leveraged ETFs sized at about 2.8 times its transaction value, a structure far higher than that of major U.S. tech stocks."
He went on, "The Korean stock market now has a structure of high volatility and large leveraged products layered on top of thinned liquidity," diagnosing, "If volatility increases while individual investors' deposits fail to keep pace with the growth in market cap, the rebalancing flows from leveraged ETFs and forced liquidations on margin could overlap in the same direction, magnifying market shocks."
He then predicted, "High volatility is likely to persist for the time being," adding, "The more the market becomes difficult, the more a rally centered again on the leading names will emerge in the big picture."