[Good Morning Stock Market] "Samsung Electronics 'Market Cap Ceiling' Unlikely to Cause Immediate Major Supply-Demand Shock"

[Asia Economy Reporter Eunmo Koo] The Korea Exchange plans to apply the ‘market capitalization cap ratio’ that limits the market capitalization of a specific stock within the KOSPI 200 index to not exceed 30% of the total, to Samsung Electronics as early as March. Concerns have arisen that a large volume of forced reduction in Samsung Electronics’ weighting in exchange-traded funds (ETFs) tracking the KOSPI 200 will inevitably flood the market, causing shocks. However, considering the scale of passive fund outflows from Samsung Electronics and the average daily trading volume, it is analyzed that there is a low possibility of an immediate significant impact on supply and demand.

◆Seungyeon Song, Researcher at Korea Investment & Securities=On the 21st, during trading hours, reports emerged that the Korea Exchange might introduce the KOSPI 200 index ‘market capitalization cap ratio’ to Samsung Electronics in February. This is because Samsung Electronics’ weighting in the KOSPI 200 has consistently exceeded the 30% cap due to its recent record-high prices. Although the cap is set based on May and November benchmarks, according to the KOSPI 200 methodology, “if the weighting of a specific stock becomes excessively high, making linked product management difficult, the cap can be adjusted at any time before the regular adjustment,” making the adjustment inevitable.

If the market capitalization cap system is applied, adjusting Samsung Electronics’ weighting within domestic passive funds, estimated at around 23 trillion KRW, will be unavoidable. As of the 20th, Samsung Electronics accounts for 33% of the KOSPI 200. However, since the market capitalization used as the basis for the cap coefficient is a three-month average, the actual applied cap is expected to be lower, and as of the 20th, the figure was 29.8%, slightly below 30%.

Assuming the size of KOSPI 200 tracking funds is 50 trillion KRW, the passive fund outflow from Samsung Electronics due to the applied cap could be estimated up to 1.5 trillion KRW. Considering Samsung Electronics’ average daily trading volume is about 780 billion KRW, the possibility of an immediate significant impact on supply and demand is low. Additionally, the fact that this system does not apply to foreign investors who sell in Korea supports the view that the intensity of fund outflows due to the cap is not a cause for concern.

Meanwhile, since the reduction in passive fund weighting due to the cap applies only to common stocks, in the current upward trend, market interest in Samsung Electronics preferred shares or futures may increase further.

◆Byunghyun Cho, Researcher at Yuanta Securities=The upward trend in the IT hardware (semiconductor) sector is accelerating further at the beginning of the year. Foreign investors are also concentrating on net buying based on expectations of mid- to long-term demand recovery. However, even since the beginning of the year, Samsung Electronics and SK Hynix have recorded returns in the double digits, and technical indicators are showing overheating signals. Yesterday, the ‘30% rule’ for Samsung Electronics became an issue again, serving as a pretext for profit-taking.

The most concerning aspect is that Samsung Electronics and SK Hynix, as the leading stocks driving the domestic stock market’s rise, have reached an all-time high in market capitalization weighting. The combined weighting of the two stocks reached 30.4% of the total market capitalization. This raises deeper concerns about whether they can maintain their leadership. The background of their leadership is the expectation of demand recovery, which, from a micro perspective, can be reflected in earnings forecasts. In fact, during periods of earnings forecast improvements in the IT sector, the market capitalization weighting clearly increases. Empirically, the expansion of these stocks’ weighting concludes when the earnings per share (EPS) recovery slows. At least from a cyclical perspective, the EPS recovery still appears to be in its early stages.