Global funds look beyond short-sale ban to snap up South Korean stocks

Investors in South Korea are betting on improving earnings and a recovery in global semiconductor sales to drive stock gains, as they focus on long-term catalysts rather than this month’s surprise short-selling ban.

Global funds have started buying the nation’s equities again after three months of net sales, while South Korean exports rose in October for the first time this year.

The market’s decline over the August-October period provides a good entry point given chip earnings are likely to rise, according to Invesco Asset Management.

Bloomberg Intelligence says demand for semiconductors and other tech hardware will reach an inflection point next year.

“There are quite a few reasons why investors may want to be overweight Korean equities heading into 2024,” said Mr David Chao, a strategist for Asia Pacific ex-Japan at Invesco in Singapore.

“Improving semiconductor fundamentals driven by an export and earnings recovery should provide a boost,” he said, adding that he also likes other exporters such as IT hardware, auto parts and industrials that could benefit in the second half of 2024 when the global economy is expected to fare better.

Volatility spiked last week as South Korea’s regulator on Nov 5 announced a full ban on short selling until the end of June 2024. The move followed repeated complaints by the legions of local retail investors against the practice of selling borrowed shares, and came just months before general elections for the National Assembly in April.

While the decision sent stocks soaring the next day amid a bout of short-covering, it spurred concerns about South Korea’s appeal for global hedge funds and banks that regularly deploy short trades in the US$1.7 trillion (S$2.3 trillion) market. The move is also seen complicating the nation’s bid to seek a developed-market status in MSCI’s indexes.

Still, to some observers the prohibition is unlikely to alter longer-term expectations for the country’s equities, especially as short selling accounts for a tiny portion of the market – about 0.6 per cent of the benchmark Kospi Index’s value, according to exchange data.

“For investors who are attracted to Korea because of either the broader economic fundamentals or the fundamentals of specific stocks, I don’t think it’s going to be a major factor,” said Mr Steven Schoenfeld, chief executive at MarketVector in New York.

“On the margin, it will be a small negative.”

Overseas investors have bought some US$1.6 billion of Korean stocks this month, the most after Taiwan in a cohort of Asian emerging markets excluding China. They offloaded a combined US$4.8 billion over the previous three months.

Funds are particularly bullish on Samsung Electronics and SK Hynix, Korea’s two-largest chip exporters that carry a combined weighting of more than 25 per cent on the Kospi. They are the two most-bought stocks by foreigners on the index in November, with total purchases of more than 1 trillion won (S$1.03 billion) on a net basis.

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