[Good Morning Stock Market] Short Selling Resumes This May... "Overall Market Impact Expected to Be Limited"

There have been instances in the past where index rises and foreign net buying followed the resumption of short selling
As the period of recognizing a short-term peak in inflation indicators approaches, US Treasury yields are declining

Dealers are working at the Hana Bank dealing room in Jung-gu, Seoul, on the 4th, following the Financial Services Commission's announcement to resume short selling only for KOSPI 200 and KOSDAQ 150 index components starting May 3. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporter Gong Byung-sun] From May, short selling will be implemented only for KOSPI 200 and KOSDAQ 150 stocks, but the market shock is not expected to be significant. However, on a stock-by-stock basis, the resumption of short selling may pose a burden in terms of supply and demand.

◆ Jeon Gyun, Samsung Securities Researcher = The market-wide shock caused by the resumption of short selling is not a cause for concern. Short selling bans were implemented in 2008 and 2011, and after lifting the ban, the KOSPI 200 rose more than 10% within three months. Foreign investors also showed net buying for 3 to 6 months. Loan balances gradually increased after the ban.

This year, due to abundant liquidity and the trend of overseas economic recovery, the resumption of short selling will not cause a major shock. However, on a stock-by-stock basis, the resumption of short selling may impose a burden on supply and demand. Localized supply-demand controversies may arise for stocks with poor business conditions and earnings, and stock selection based on fundamentals will proceed. Paradoxically, stocks within the KOSPI 200 and KOSDAQ 150 with improved business model fundamentals are safe from short selling risks. In June, temporary price shocks may occur depending on the increase or decrease of short selling in stocks entering or leaving the KOSPI 200 and KOSDAQ 150 during the regular changes.

Before the resumption of short selling, it is necessary to check changes in loan balances of KOSPI 200 and KOSDAQ 150 constituent stocks to confirm short selling capacity. Once short selling resumes, buying and selling strategies will be activated, and overvalued individual stocks will gradually revert to their value.

◆ Park Seung-jin, Hana Financial Investment Researcher = The US 10-year Treasury yield has stabilized rapidly and is currently trading around 1.5-1.6%. Some in the market explain the recent decline in yields as a change in perception of the US Federal Reserve's (Fed) monetary policy, but the Fed has not made any particular change in its stance.

One of the main reasons for the change in the US bond market sentiment is the approaching recognition of a short-term peak in inflation indicators. Until this month, the Consumer Price Index (CPI) is significantly affected by the base effect of energy prices, but the direction is likely to change afterward. Housing costs, which account for about 33% of the US CPI, are expected to rise, but energy prices are expected to fluctuate sharply while housing costs will likely continue a gradual rebound. Therefore, inflation concerns are expected to peak in May and enter a easing phase by mid-third quarter.

In terms of supply and demand, capital inflows and outflows centered on foreign investors are influencing the market. At the end of last month, Japanese financial institutions, ahead of their fiscal year-end closing (book closing), sold US Treasuries and then repurchased them. This process is believed to have increased volatility in US Treasury yields. In fact, a correlation has been confirmed between Japan's net overseas bond purchases and the US 10-year Treasury yield.

The gap in vaccine procurement also directly affects expectations for the timing of monetary policy normalization, and advanced countries' government bond yields reflect this. So far, US Treasuries, which have seen the largest rise in yields and have attractive absolute yields, are emerging as an investment target.

◆ Kim Kyung-hwan, Hana Financial Investment Researcher = In the first quarter of this year, the Chinese stock market failed to overcome relative disadvantages in economy, interest rates, and exchange rates compared to the US. Internally, it showed vulnerability to liquidity and policy normalization, resulting in a weaker performance compared to major countries. Looking at one year after the COVID-19 pandemic, China's economy showed the fastest V-shaped recovery among major countries, peaked in the fourth quarter of last year, and showed a second low in the first quarter.

Liquidity and policy cycles are expected to gradually decline over six months after the peak. However, considering the Chinese authorities' targets this year, total social financing is likely to exceed the 2019 average of 10.6%. Total social financing is known as a barometer of liquidity. Even if it declines in the second half due to base effects, the actual supply amount is expected to support a soft landing.

China's credit risk (credit-based transactions) is predicted to pass its peak in the second quarter from a real interest rate perspective. China's credit risk is concentrated in the corporate sector, and among the three main entities, manufacturing and real estate are influenced by real interest rates, while local government-related debt depends most on the authorities' will. Since 2018, the upward trend in real interest rates is likely to have passed its peak before the second quarter, so large-scale defaults are expected to be limited this year. However, defaults in local government-related companies, manufacturing, and underperforming real estate firms, where the Chinese authorities have strong restructuring intentions, are inevitable.