[MarketING] KOSDAQ Holds Up Well Despite Tightening Concerns... Overheated?

KOSPI Falls Over 1% Amid Tightening Concerns
KOSDAQ's Relative Strength Raises Overheating Worries

[Image source=Yonhap News]

The KOSPI closed lower after six trading days due to concerns over tightening originating from the U.S. On the day, the KOSPI fell more than 1%, while the KOSDAQ held up with a slight decline. However, there are forecasts that overheating signals will gradually appear in the KOSDAQ due to a concentration phenomenon driving the rally.

KOSPI Falls Over 1%... KOSDAQ Down 0.22%

On the 8th, the KOSPI closed at 2,431.91, down 31.44 points (1.28%) from the previous day. The KOSDAQ ended the session at 813.95, down 1.81 points (0.22%).

The hawkish remarks by Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), reignited concerns over tightening, pulling the indices down. As a result, the won-dollar exchange rate surged more than 20 won during the session, climbing back into the 1,320 won range. Amid the dollar's strength, foreign investors sold 161.8 billion won in the KOSPI market and 51.6 billion won in the KOSDAQ market. Institutions also sold 819.9 billion won and 177.2 billion won respectively, driving the index decline. Individuals were the sole net buyers, purchasing 943 billion won and 245 billion won respectively.

Kim Seok-hwan, a researcher at Mirae Asset Securities, explained, "The domestic stock market showed weakness in line with the falling U.S. stock market following Chairman Powell's remarks on accelerating interest rate hikes. The KOSPI saw weakness in tech stocks such as NAVER and Kakao due to U.S. terminal rate outlooks, while the KOSDAQ's bottom was supported by the steady performance of secondary battery stocks."

Secondary battery stocks, which had shown weakness due to profit-taking the previous day, rebounded strongly, defending the index decline. The leading stock Ecopro BM rose 1.7%, and Ecopro surged 14.38%.

Regarding Ecopro BM, the leading stock of the KOSDAQ, it is being recognized as a historically significant market leader. Laborngil, a researcher at NH Investment & Securities, said, "The reason Ecopro BM can be seen as a historically significant leader is due to its market capitalization weight. Ecopro BM's market cap weight in the KOSDAQ has started to exceed 5%, and since 2005, stocks that have left their names by surpassing a 5% market cap weight in the KOSDAQ include Seoul Semiconductor, Celltrion, and Celltrion Healthcare, with Ecopro BM newly joining this list." He added, "Especially considering that since 2010, KOSDAQ leaders were mainly in healthcare, this marks a monumental event replacing that with secondary batteries."

There is analysis that the strength of secondary battery stocks has reasons behind it. Kang Dae-seok, a researcher at Yuanta Securities, said, "The rise of secondary batteries leading the KOSDAQ has been prominent since February. Although the slope was steeper than expected, it was justified. While Korean exports are struggling, secondary battery exports are performing well, recording a 25% year-on-year increase in February exports, gradually increasing their share of total export value." The expected operating profit share within the stock market over the next 12 months is also rapidly expanding. Kang explained, "As the profit share increases, the market cap weight is naturally expanding as well. In a time when growth is scarce, the rise of secondary batteries is a justified rally."

Overheating Signals Expected to Appear Gradually Due to Concentration Phenomenon

If the KOSDAQ closes this week with gains, it will mark 10 consecutive weeks of gains on a weekly basis. This would be the first time in about eight years since January to March 2015 that the KOSDAQ has risen for 10 straight weeks. Although the sharp rise in the KOSDAQ cannot yet be considered overheating, there are forecasts that overheating signals will gradually emerge.

Kang said, "It is difficult to view the KOSDAQ's strength, driven by the rise in secondary batteries, as excessive. However, due to the concentration phenomenon, overheating signals may gradually appear." He added, "The equal-weighted KOSDAQ150 index is underperforming the market cap-weighted index, which means the rally is concentrated in certain top market cap stocks. Following this trend carries significant risk."

If the secondary battery stocks that have shown a sharp rise pass their peak, alternatives include healthcare and renewable energy. Researcher Roh said, "If looking for alternatives to secondary batteries in the KOSDAQ currently, healthcare and renewable energy are considered favorable from the perspective of overlooked stocks. Based on three-month returns, these are theme candidates that have stepped away from being market leaders."