[MarketING] January Effect Missing?..."Focus on Defensive Stocks"

Foreigners and Institutions Realize Gains
Conservative Response Focused on Defensive Stocks Needed

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] The stock market, which started the new year on an upward trend, closed lower. It failed to maintain its gains due to selling pressure from institutions and foreigners. With expectations that foreigners' profit-taking selling pressure will continue, cautious responses focusing on defensive stocks are likely necessary for the time being.

Stock Market's 'Strong Start, Weak Finish' on First Day Due to Foreign and Institutional Selling

On the 2nd, the KOSPI closed at 225.67, down 10.73 points (0.48%) from the previous trading day. The KOSPI started the day with a rise of over 0.6% and even climbed more than 1% during the session, but ended the day lower due to aggressive selling by institutions. The KOSDAQ also closed at 671.51, down 7.78 points (1.15%) from the previous day. Although the KOSDAQ rose more than 1% early in the session, it could not sustain the gains amid simultaneous selling by foreigners and institutions.

On that day, institutions sold 293.8 billion KRW, and foreigners sold 49.7 billion KRW. Individuals alone bought 292.9 billion KRW, but it was insufficient to defend the index.

With the challenging environment surrounding the stock market at the beginning of the year, movements in the index driven by supply and demand are expected to become more pronounced. Selling pressure from institutions, which had been buying until before the December ex-dividend date, is expected to continue, increasing downward pressure. Lee Kyungmin, a researcher at Daishin Securities, analyzed, "In January, we need to worry about the boomerang effect of the supply-demand seasonality from December of the previous year. Since mid-November, the loan balance has decreased by more than 13 trillion KRW, and from early December until before the ex-dividend date, financial investment companies' purchases amounted to 3.3 trillion KRW, which was a result of cost burden reduction and dividend arbitrage trading before dividends." He added, "However, after the ex-dividend date, short selling is newly established and futures basis normalizes, leading to program selling. The sharp drop at the end of last year was also largely influenced by massive selling from financial investment companies."

Pressure from foreigners' profit-taking selling is also likely to continue. Despite the won's strengthening trend since December, foreign investors have continued to sell. Foreigners have sold 1.926 trillion KRW in the domestic stock market over the past month. Lee said, "This is because, with the start of the Q4 pre-earnings season, earnings forecasts have been revised downward again. This has led to valuation burdens and is believed to have stimulated foreigners' profit-taking sentiment."

Focus on Defensive Stocks for Response

Due to concerns about an economic recession, a surprise rebound at the beginning of the year is unlikely. Following the disappearance of the Santa Rally at the end of last year, the January effect also seems absent. With investment sentiment heavily dampened by recession fears, it appears necessary to focus on defensive stocks for the time being.

Kim Daejun, a researcher at Korea Investment & Securities, explained, "It is not easy to increase stock exposure in a phase where economic momentum is weakening. A conservative approach is necessary, and from a strategic perspective, selecting sectors that are less sensitive to the economy and have strong downside rigidity can help protect returns." Considering the decline in leading economic indicators and downward revisions of net profit estimates, Kim recommended increasing exposure to essential consumer goods such as food and beverages, utilities, and healthcare sectors.

Labor Gil, a researcher at Shinhan Investment Corp., also said, "A conservative approach focusing on sectors with relatively safe Q4 earnings and defensive stocks is necessary," adding, "Hotels, utilities, and essential consumer goods fall into this category."