With the KOSPI plunging nearly 30% from its peak, an analysis said buying driven by rebalancing (asset readjustment) by foreigners and pension funds could ramp up. Because Korea's weight has fallen versus the global benchmark (BM) due to the sharp index drop, the incentive to buy has grown from an asset-allocation perspective.
On the 15th, Hana Securities researcher Lee Kyung-soo said in a report, "A sharp index correction is instead a rebalancing (buying) factor for asset-allocation houses (foreigners + pension funds)," adding, "Rather than rebounding immediately from an MDD (maximum drawdown) of -25%, the market needs to confirm foreign buying and gradually build confidence in the bottom."
Looking at past cases, reaching a -25% drawdown after the peak did not immediately form a bottom. Hana Securities analyzed cases in which the prior one-year revenue was at least 20% and the MDD hit -25%, and found that only one out of four instances marked the bottom in that range. During the 2009 financial crisis, the market rebounded right after recording an MDD of -26%, but in the other cases additional declines followed and the final drawdown widened to an average of -43%.
However, there was a common shift in supply-demand dynamics during the bottoming process. Foreigners turned to net buying and individuals shifted to net selling, signaling a full-fledged "changing of hands."
Lee said, "In the above cases, after the true bottom in the KOSPI, the shift to foreign buying and individual selling was clearly trendlike," explaining, "A changing of hands between individuals who had been averaging down to endure losses and foreigners turning to net buying after the sharp drop in the Korea index is a key signal for the bottom."
He added, "In the second IT bubble case and in the 2004 and 2009 bottom cases, foreigners also attempted to switch to net buying just before the bottom," and said, "Attention is needed on the KOSPI's net buying of 2 trillion won by foreigners and net selling of 5.8 trillion won by individuals on the 14th. The more foreign buying and individual selling (forced selling, etc.) continue, the higher the confidence in the bottom will be."
He cited global asset-allocation strategy as the backdrop for foreign buying. He said large institutions such as foreigners and the National Pension Service have a tendency to rebalance portfolios in the opposite direction of sharp swings.
Lee said, "Foreigners and pension funds are investor groups driven by global asset allocation, and from an insurance-like asset-allocation perspective they ultimately adjust the BM in the direction opposite the market's 'sharp' moves," adding, "When the KOSPI fell to 6,850 points, Korea's weight in the MSCI Emerging Markets Index (EM) dropped to about 17%, below the BM (21%). At the current index level, unless they are running an underweight strategy, the likelihood of net buying is higher."
He also viewed that the National Pension Service's need for additional rebalancing sales has eased as the domestic equity weight has come down into the target range.
He also assessed that it is difficult to see forced selling as being in the final stage yet.
Lee said, "Today (the 15th), two days after the 13th, when the KOSPI MDD was the lowest, will be the short-term peak of forced selling in a lagging manner," but added, "If stock prices rebound sharply, forced selling will be deferred, and if they plunge, additional forced selling could surge."
He added, "During the 2004 China shock, the 2008 Lehman Brothers bankruptcy, and the 2020 COVID-19 period, the decline in margin financing was around -9% to -14%, but now it is only around -3%," noting, "Forced selling could accelerate, or conversely, pass its peak and the index could rebound, so it is still early to conclude either way."