[Good Morning Stock Market] Individual Buying Power Remains... The Problem Is 'Jongmok Ssolrim'

The above photo is not related to the article (Photo by Asia Economy DB)

[Asia Economy Reporter Kum Boryeong] As individual investors appear to be leading the domestic stock market, there is an analysis that individual buying power still remains. In the current financial market phase, individual funds are expected to be a driving force. However, concerns have been raised not about market 'overheating' but about the 'concentration' phenomenon in certain stocks.

◆ Choi Yujun, Researcher at Shinhan Financial Investment = Since the beginning of the year, individuals have net purchased 32.8 trillion KRW and 7.9 trillion KRW in KOSPI and KOSDAQ respectively, driving the stock market upward. This is unusual given that the shock from the novel coronavirus infection (COVID-19) has not yet dissipated. Currently, the market is in a financial phase among the four seasons of the stock market. Although the economy is in a recession phase, the stock market is rebounding due to government and central bank stimulus measures. Interest rates are falling, and the number of individual investors participating in the stock market is increasing. This phase was triggered by a bottom-fishing influx following the market crash in March, but underlying it was the continuation of low interest rates. When interest rates fall, the opportunity cost of entering the stock market decreases.

There is much interest in whether the fountain-like individual buying rally will continue. Considering the proportion of stocks in household financial assets, there is sufficient additional buying power. The higher the level of development, the greater the proportion of stocks in financial assets. This is because direct capital raising by companies is high, resulting in abundant stock supply, and low interest rates persist, making stocks an alternative. On the other hand, the proportion of stocks in Korean households' and non-profit organizations' financial assets has declined. This is due to intensified fund concentration in real estate, expansion of indirect investments such as pensions and funds, decreased preference for risky assets due to aging, and reduced interest in the stock market due to long-term sideways movement.

This year, the atmosphere reversed, and individuals purchased a combined 41 trillion KRW in KOSPI and KOSDAQ. Although buying has slowed since June due to concerns about the market peak, it continues. Liquidity has played a major role. Easing monetary policy has increased market liquidity. In April this year, Lf (Liquidity of Financial Institutions) increased by 8% compared to the previous year. When Lf increases, the financial assets held by economic agents also increase. If financial assets held this year increase by 8% compared to last year and the stock proportion recovers to the financial phase average of 16%, individuals have about 45 trillion KRW of additional buying power. The domestic stock balance held by households and non-profit organizations was 596 trillion KRW at the end of last year, and under these assumptions, it would be 687 trillion KRW this year. Reflecting this year's individual net purchase amount of 46 trillion KRW, which includes valuation gains, results in an additional buying power of 45 trillion KRW. This will support the market floor rather than push the market upward. Further rises depend on fundamental improvements.

◆ Lee Jinwoo, Researcher at Meritz Securities = Although the stock market has succeeded in a 'V'-shaped rebound since last March, the atmosphere is divided before and after June. Before June, many stocks rose together, but now this is not the case. The rising stocks have been concentrated around leading stocks. Investors outside the leading stocks may not be pleased with the recent market rebound.

The problem now is not the 'market' but the 'stocks'(?). Despite the stock market rebounding again, overheating indicators (RSI, generally interpreted as overheating above 70) are rather at bottom levels. The only time the market could be judged as entering an overheating zone was in early June. This was because 44% of all S&P 500 constituent stocks had entered the overheating zone. Currently, only 2.5% of stocks show overheating patterns. This means the probability of success in stock selection has plummeted from 44% before June to the 2% range now. This is why it is difficult to make profits these days.

The situation in Korea is no different. Although there is a difference in degree compared to the US, the number of stocks with RSI above 70, an overheating indicator, rose to 15% of the entire KOSPI in early June but now stands at 3.3%. Empirically, stock price corrections due to market overheating occurred when the proportion of overheating stocks in the US was above 20% and in Korea above 15%. Currently, both the US and Korea are far from market overheating.