NH Investment & Securities cited a "many births, few deaths" structure—with many listings but few exits of insolvent companies—as the fundamental reason why KOSDAQ has failed to shake off negative returns compared with the start of the year despite a recent rebound. It said if tougher delisting rules and the introduction of a KOSDAQ promotion and relegation system improve the market's fundamentals, the index could try to climb back to the 1,000 level after September.
Researcher Lee Sang-jun at NH Investment & Securities said in a report on the 10th, "The fundamental reason for KOSDAQ's slump is the loss of market confidence due to weak fundamentals and high valuations," adding, "The background is a 'many births, few deaths' structure, with many listings and few exits of insolvent companies."
In fact, KOSDAQ rebounded after hitting a 16-month low on the 30th of last month, but it is not much different from the level before the current administration took office, and its return compared with the start of the year is still negative.
NH Investment & Securities viewed the government's push to strengthen the delisting regime as the first step to improve the market's fundamentals. The existing domestic delisting rules have drawn criticism for having low thresholds and long grace periods, delaying the exit of marginal companies.
The government is pursuing "four strengthened delisting requirements," including raising the minimum market capitalization threshold, creating a penny stock criterion, checking for complete capital impairment on a semiannual basis, and lowering the threshold for cumulative disclosure penalty points. The explanation is that if marginal companies exit the market quickly, KOSDAQ's overall earnings level will rise and valuation pressure could ease.
Introducing promotion and relegation was also cited as a key policy to resolve the KOSDAQ discount. Until now, top-quality companies by market capitalization on KOSDAQ have chosen to transfer to KOSPI, repeatedly increasing the relative share of insolvent firms.
The promotion and relegation system under government review would divide KOSDAQ into three segments to separate quality companies from insolvent ones. Among them, the "Select (Premium)" segment, which will include quality companies, is expected to strictly manage entry and maintenance conditions to prevent KOSDAQ's quality names from leaving.
Lee said, "For KOSDAQ to rise above the 1,000-point benchmark index and trend upward over the long term, normalization efforts are necessary," adding, "It needs to be a market that expels marginal companies, prevents the departure of quality firms, and can absorb promising companies like unicorns, which would also change investors' perceptions."
Lee added, "Once market trust is formed, long-term institutional funds such as pension funds will naturally flow in."
Policy events are expected to continue in the short term as well. In the second half of this year, the Public Growth Fund is scheduled, and the final plan for the KOSDAQ promotion and relegation system is also expected to be confirmed in September to October.
Lee said, "Even if a V-shaped rebound is limited, KOSDAQ's upward momentum will expand again after September on the back of policy effects," adding, "We expect the index to recover to around 1,000 points again."