Will Foreigners and Institutions Betting on Stock Market Decline Smile?

Massive Net Buying of Inverse 2X ETF Last Month
Recorded 10% Return Amid Index Decline

[Asia Economy Reporter Hyungsoo Park] The domestic stock market closed lower on the first day of the new year. Foreign and institutional investors, who had been actively purchasing inverse exchange-traded funds (ETFs) over the past month, saw a slight increase in their evaluation returns.

According to the financial investment industry, foreigners recorded a net sale of 1.7 trillion KRW in the domestic KOSPI market from December 1 to 29 last year. They sold Samsung Electronics and SK Hynix stocks worth 750 billion KRW and 540 billion KRW, respectively.

Due to the semiconductor industry's downturn, earnings estimates for the fourth quarter of last year were continuously revised downward, causing Samsung Electronics and SK Hynix stock prices to fall by more than 11% last month. Lee Seung-woo, a researcher at Eugene Investment & Securities, explained, "The outlook for the semiconductor industry this year is not bright," adding, "There are significant concerns that semiconductor prices will decline due to inventory burdens and corporate profits will deteriorate sharply."

Foreigners, who heavily sold Samsung Electronics and SK Hynix, which have a large weighting in the domestic stock market, actively purchased the KODEX 200 Futures Inverse 2X ETF. They net bought 300 billion KRW worth last month, ranking among the top net purchases by foreigners. Inverse ETFs generate profits when the underlying index falls. The KODEX 200 Futures Inverse 2X ETF rose more than 17% from 2,945 KRW to 3,450 KRW during December. The average purchase price for foreigners was 3,163 KRW, resulting in an evaluation return of 9%.

Viewing the semiconductor industry conservatively, foreigners reduced losses by selling semiconductor stocks and made profits by heavily buying ETFs that gain when the index declines.

Domestic institutional investors anticipated a market decline but responded with a low-price buying strategy for semiconductor stocks. Institutions also purchased 400 billion KRW worth of the KODEX 200 Futures Inverse 2X ETF last month. They bought more than 100 billion KRW of KODEX inverse ETFs as well. Thanks to their investment anticipating an index decline, they are recording evaluation gains. They also net bought over 200 billion KRW worth of Samsung Electronics shares. It appears they took advantage of the large price drop to buy at low prices. The average purchase price for institutions in Samsung Electronics last month was 59,300 KRW, which is 6% higher than the current stock price.

Institutions heavily sold secondary battery stocks. Samsung SDI, LG Energy Solution, and LG Chem all ranked among the top net sold stocks by institutions. The total net sale amount for these three listed companies exceeded 960 billion KRW. This is interpreted as profit-taking by selling secondary battery stocks that led the market and rose in price this year. At the end of last year, Tesla's stock price plunged due to concerns over weak electric vehicle demand.

Kang Dong-jin, a researcher at Hyundai Motor Securities, said, "Recently, concerns over weak electric vehicle demand, centered on Tesla, have increased," adding, "These demand concerns are expected to ease by the end of next month when U.S. demand for January is confirmed or by the end of the first quarter of this year when sales demand for the new year is verified."

While foreigners and institutions actively purchased the KODEX 200 Futures Inverse 2X ETF, individual investors took the opportunity to realize profits. They net sold 687.9 billion KRW worth last month alone. Instead, they absorbed the shares sold by foreigners and institutions, such as Samsung Electronics, SK Hynix, and LG Energy Solution. Expecting the January effect, they appear to have sold ETFs that profit from index declines and bought leading domestic stocks.