Kosdaq market could surpass Kospi in trading value in 2023

The trading value of South Korea’s secondary Kosdaq market trading value could surpass that of the main Kospi market this year for the first time since its inception in 1996. A combination of weak performance in large-cap stocks on the Kospi and a surge in thematic stocks on the Kosdaq led to an influx of individual investors into the secondary market, making the surpass possible, according to the country’s securities exchange operator on Thursday. While this indicates quantitative growth in liquidity in the Kosdaq market, concerns remain about the stability of its stock prices.

According to the Korea Exchange on Thursday, the average daily trading value of the Kosdaq market this year was 10.71 trillion won ($8.03 billion) at the end of August. During this period, it narrowly surpassed the Kospi market, whose trading value was 10.11 trillion won.

Market insiders consider this exceptional, given that the tech heavy Kosdaq market has a higher participation rate of individual investors than foreigners and institutional investors. If the current trend continues, 2023 will be the first time the Kosdaq has overtaken the Kospi in trading value since the former’s inception. Just last year, there was a significant difference in the average daily trading value between the Kospi at 9.69 trillion won and the Kosdaq at 6.9 trillion won. In 2021, which saw the largest trading volume on record, the gap grew even wider with 15.42 trillion won for the Kospi and 11.86 trillion won for the Kosdaq. Even in 2000, when the dot-com bubble burst and the Kosdaq’s trading value soared, the Kospi’s trading value reached 2.60 trillion won, outpacing the Kosdaq’s 2.40 trillion won.

Analysts note that the various thematic trends in the market this year caused trading to be focused on the Kosdaq while the top large-cap stocks. Kospi remained in a range, leading to a decline in individual investors’ interest in the main stock market.

This phenomenon is even more pronounced when analyzing the representative stocks of the two major markets. During the period, market bellwether Samsung Electronics Co.’s average daily trading value of 883.1 billion won was down 4.5 percent from last year‘s 923 billion won and plunged 41.3 percent from 1.50 trillion won in 2021, when the stock market was booming. On the Kosdaq market, however, the average daily trading value of leading electric-vehicle battery materials supplier EcoPro Group increased more than eightfold to 801 billion won this year from 69.5 billion won last year. This, alongside other themes such as superconductors, saw the Kosdaq market literally siphon off funds from retail investors. “The trading volume is highly influenced by the trading trends of individual investors, who are more active in buying and selling than institutions and foreigners with long-term investment tendencies,” an analyst at a securities firm said.

The rate of return also played a role in leading investors away from the Kospi to the Kosdaq. While the Kospi gained just 14.3 percent from the beginning of the year to last month, the Kosdaq surged 36.67 percent.

There are also concerns about the concentration of trading on the secondary market as frequent turnovers can lead to increased stock price volatility. During these periods, the market capitalization turnover rate of the Kosdaq market was 2.68 percent, which is over five times higher than that of the Kospi at 0.5 percent. The recent trend of Kosdaq-listed companies pursuing a move to the Kospi is also related to excessive stock price volatility. “The incentive for Kosdaq-listed companies to pursue a move to the Kospi lies more in stock price stability than in stock price increases,” according to a financial investment industry insider. “When raising funds through a capital increase, increased stock price volatility can make it difficult to predict the price of a new stock issue and hinder stable financing.”

Meanwhile, the Kospi may yet surpass the Kosdaq in trading value again by the end of this year. With the recent influx of foreign investor funds back into Samsung Electronics, the second half of the year could see a market dominated by large-cap stocks.