On the 31st, the KOSPI index surged 17%, delivering a stunning rally. There are concerns about a temporary rebound, but the prevailing view is that it will recover into an upward trend in the long term. Who will lead stock gains in the recovery phase after the plunge? An analysis of past recoveries after sharp sell-offs showed that the leaders that drove the transfer bull market ultimately posted the highest returns.
According to the Korea Exchange (KRX) on the 3rd, the KOSPI index closed at 6,595.45 on the 31st, up 1,001.89 (17.91%) from the previous trading day. The KOSPI index plunged 40% in July, a steeper drop than during the financial crisis. But it finished with a sharp gain the previous day as option deleveraging (reducing excessive leveraged positions) and short covering (closing short positions) converged.
In August, the prevailing view is that the market will recover into an upward trend. Lee Kyung-min, a researcher at Daishin Securities, said, "In July, KOSPI prices ran in the exact opposite direction of fundamentals," and noted, "If supply-demand shocks subside, market attention will shift back to semiconductor results and memory, setting off a rapid valuation normalization phase." Daishin Securities said that if the KOSPI index settles in the 6,500–6,800 range, it could first break back above 8,200. Kiwoom Securities set the upper end of its August KOSPI forecast at 7,800.
If the stock market turns upward, which stocks will rise? Looking back at the dot-com bubble, the financial crisis, and the Covid-19 rate-hike phase, leaders ultimately led the uptrend. Lee Jae-man, a researcher at Hana Securities, explained, "Looking at past KOSPI cases, after a sharp index decline, the stock returns of the leading sectors that created the transfer bull market led the index rebound."
First, during the 2000 dot-com bubble, the KOSPI index fell 55.7% from 1,059.04 to 468.75 in nine months. The leading sectors at the time, securities and electrical/electronics, fell 60% and 61%, respectively. In the subsequent rebound phase, they each surged 141% and 123% from the bottom in six months, ranking 5th and 8th in sector returns.
During the 2008 global financial crisis, the KOSPI fell 54.5% from the short-term high of 2,064.85 to 938.75. The sectors that had led the bull market—chemicals, shipbuilding, and machinery—tumbled 60%, 79%, and 73%, respectively. However, in the six months after the bottom, they rebounded 72%, 107%, and 98%, ranking 9th, 2nd, and 3rd in sector returns.
In the post-Covid-19 tightening (rate-hike) phase, when there was a short-term plunge, the KOSPI fell 34.8% from 3,305.21 to 2,155.49. The leading sectors at the time, chemicals and secondary batteries, dropped 31% and 14%, respectively, but in six months after the bottom they rose 37% and 75%, recouping a significant portion of the losses. During that period, sector returns ranked 4th and 1st, respectively.
Still, some in the market warn that deleveraging may not be fully over, leaving room for short-term volatility. Lee Eun-taek, a researcher at KB証券, said, "Considering the increased trading volume of high-risk ETFs, it can be seen that investors who used credit to create leverage have moved to leveraged ETFs," and analyzed, "The actual scale of deleveraging may be smaller than thought." In fact, as profit-taking orders hit the market that day, the KOSPI index is falling by about 4%.
Along with this, there is analysis that risk-adjusted performance may fall short of expectations as high volatility persists. Kwon Sun-ho, a researcher at Daishin Securities, explained, "Large caps and former leaders did not have relatively strong risk-adjusted performance," and "When comparing risk-adjusted performance, the average performance was actually highest among companies whose shares had fallen the most from their 52-week highs."