[SHORTCUT] Thinking of joining the Kospi gold rush? Here's what you need to know

While retail investors are still buying, many wonder if it really is still a good time to start investing in stocks, or whether small investors are just being pushed along because they're scared they might miss out on the gold rush.

A digital screen in KB Kookmin Bank’s dealing room in Yeouido, western Seoul, shows the Kospi declined by 3.03 percent, or 92.84 points, to close at 2,976.21 on Friday. It is the fourth consecutive day the Kospi has fallen. [YONHAP]

Q. The Korean stock market is always in the headlines. Should I be investing?

A. Seoul's main bourse Kospi grew very fast from the last two months of 2020 after recovering from a plunge to as low as 1,457.64 in March during the first wave of the coronavirus pandemic.

On Nov. 2, the Kospi index closed at 2,300.61. On Dec. 1, the index closed at 2.634.25. After closing at 2,759.82 on Dec. 23, the index passed 2,800 for the first time ever on Dec. 24, then 2,900 on Jan. 4 and 3,000 on Jan. 7, growing by nearly 300 points in a matter of two weeks.

On Jan. 25, the benchmark index even punched through the 3,200-mark for the first time in history, at 3,208.99, breaking the Kospi's upper target for 2021 predicted by multiple brokerages only a month into this year.

But Seoul’s benchmark index has been weakening recently, extending declines to a fourth day on Friday when it closed at 2,976.21, down 3.03 percent from the previous trading day.

While retail investors are still buying, many wonder if it really is still a good time to start investing in stocks, or whether small investors are just being pushed along because they're scared they might miss out on the gold rush.

Analyst Seo Sang-young from Kiwoom Securities said investors can always invest, but “they have to seek long-term profits from the stock market.”

Seo said amateur investors are misunderstanding the stock market as a game where you play the stock prices to turn a quick profit, but stock trading actually is a means of raising corporate value by becoming part-owner of a company.

Seo advised investors to strive to reduce leverage in their investments to reduce risks as the stock market has become highly volatile.

Lee Kyoung-min, an analyst from Daishin Securities, said another buying chance for investors may come soon, as the Kospi index has been falling recently.

Many retail investors had jumped into the market after the big plunge in March, when the Kospi index fell below the 1,500-mark.

Q. Will the index continue to grow?

The Kospi declined recently. On Friday, retail investors were the only buyers, net purchasing some 1.7 trillion won ($1.5 billion) worth shares while foreign investors net sold 1.4 trillion won and institutional investors offloaded 255.2 billion won worth shares.

There were multiple factors that caused the fall.

Analysts point out that first, the index shot up too quickly, increasing the volatility of the market. As the index grew rapidly, it could also fall quickly.

Also, while foreign hedge funds heavily bought semiconductor, battery and bio shares at the end of last year, they are now dumping those shares for profit.

The analysts, however, mostly say that the recent fall of the Kospi doesn’t mean it is the beginning of a long slide.

Lee said in a report Thursday that the index is taking a step back to advance two steps forward in the future.

According to Lee, it is a natural adjustment in the stock market after quick growth, and the index is expected to bounce back after short-term declines as major drivers, such as abundant liquidity and economic recovery, remain.

Q. What were the major drivers of the bullish rally?

Abundant liquidity, heavy buying by retail investors and major Korean exporters being relatively intact despite the coronavirus pandemic have been the main drivers of the index.

To relieve households and companies from the economic fallout spurred by Covid-19, the Bank of Korea lowered the country's key interest rate to a record low 0.5 percent in May last year and has maintained that rate. Similar expansionary monetary policies have been put in place by global governments affected by the virus.

Low interest rates and special loan programs for Covid-19-affected businesses and several rounds of relief funds gave retail investors the money to invest. As investment into real estate became tougher as the administration tightened regulations on house purchases throughout last year, much of the money flew into the stock market.

According to data from the Korea Financial Investment Association, investor deposits amount to 70.2 trillion won as of Jan. 27. Investors’ deposits are stand-by money that investors give to brokerages for future stock purchases. The deposited money has been constantly increasing from the beginning of last year.

On Jan. 2, the deposits were at 29.9 trillion won and the amount grew to 53.3 trillion won on Nov. 2 and 65.5 trillion won at the end of the 2020.

Considering investor deposits mostly remained between 23 trillion won and 28 trillion won throughout 2018 and 2019, the growth in 2020 has been surprisingly fast.

Through Friday, retail investors net bought 24.5 trillion won worth of stocks on the Kospi this year, while institutional investors net sold 20 trillion won and foreign investors offloaded 4.78 trillion won during the same period.

Retail investors have focused on large caps considered relatively safe to invest in. Their top pick this year through Friday was market bellwether Samsung Electronics and its preferred stock. Retail investors net bought 10.16 trillion won worth of Samsung common shares and 1.9 trillion won of preferred stocks.

Auto parts maker Hyundai Mobis, carmaker Hyundai Motor and chipmaker SK hynix were among the top five picks for individual investors.

These blue chips are also major exporters. Large cap battery makers and biopharmaceutical companies were also popular.

Q. Some seem to be "panic buying" stocks because they're scared of missing out.

As the stock market grows at unprecedented speeds while interest rates for bank savings remain extremely low, even those that were quite ignorant of the stock market have started to be scared of missing out.

The fear has led many to even borrow to invest, under the assumption that borrowing rates will be lower than margins from stocks.

According to a report from the Bank of Korea, household debt amounted to 1,682.1 trillion won at the end of the third quarter in 2020, growing by 7 percent year-on-year. The amount outpaced the country's nominal GDP growth for the first time ever. Household debt-to-nominal-GDP ratio reached 101.1 percent as of the third quarter, rising by 7.4 percentage points on year.

The central bank’s report said a number of statistics suggest borrowed money was used, mostly to buy property, invest in stocks and to cover living expenses.

As household debt snowballs and borrowed money keeps flowing into the stock market, experts warn that investors always need to be careful with borrowed money because it could be difficult for them to maintain long-term investments, especially in unexpected economic events such as a sudden raise in interests rates or drop in the stock market.

Q. What is short selling and why has it become such a big issue?

A factor that could greatly affect investments by retail investors in the near future is whether a ban on short selling is lifted or not in March.

The government imposed a temporary ban on short selling in March last year as the Korean stock market slumped following the first wave of the coronavirus pandemic.

Short selling is when an investor borrows stock and sells the stock immediately in the hope of buying it back at a lower price, repaying the loan and pocketing the difference.

While the Financial Services Commission (FSC) was planning on resuming short selling from March, it recently changed its stance by saying nothing has been decided yet as retail investors argue the ban should remain in place to level the playing field between retail investors and foreign and institutional investors. The discussion grew more intense as the ruling party sided with retail investors ahead of the April by-elections for the mayors of Seoul and Busan.

While it is true borrowed stocks available to retail investors are small compared to foreign and institutional investors, as they relatively lack funding and expertise, short selling could be a way of eliminating bubbles in the stock market, bringing stock prices to a reasonable level.

Andreas Bauer, International Monetary Fund mission chief on Korea and assistant director to the Asia and Pacific Department, said “conditions are in place to move to reinstate this practice of short selling” as financial conditions in Korea have stabilized.

Bauer added that while it is important to protect retail investors and level the playing field, “an outright ban on short selling on those grounds is a very blunt instrument to address this concern,” warning it could cause more costs in terms of market efficiency.

Short selling is at the center of controversy in other markets as well, with the recent surge in prices of GameStop led by a coordinated buying spree by Reddit users. The group of users coordinated the move in an effort to punish large hedge funds that aimed to profit from short selling.

The FSC is likely to make an announcement regarding short selling next month.

The financial authorities are currently focusing on improving the short-selling system in Korea to more harshly punish those engaging in illegal short selling and give retail investors more opportunities.

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr]