[The Editors' Verdict] Analysts Afraid to Issue 'Sell' Ratings and the Weak Resilience of the Stock Market

K-Leading Stocks Collapse on a Single Foreign Sell Report
Domestic Analysts Must Strengthen Independent Opinions to Avoid Overreliance on Foreign Reports
Building Resilience Needed for a Capital Market Vulnerable to Foreign Investor Flows

The influence of reports from global investment banks (IBs) was tremendous. On the 15th of last month, when Morgan Stanley adjusted SK Hynix's investment opinion and target price from 'Buy' (target price 260,000 KRW) to 'Sell' (120,000 KRW), SK Hynix's stock price plunged 6.14% on September 19, the first trading day after the Chuseok holiday. Recently, Macquarie lowered Samsung Electronics' target price from 125,000 KRW to 64,000 KRW and downgraded its investment opinion from 'Buy' to 'Neutral.' Since then, Samsung Electronics has fallen to the 50,000 KRW range, hitting a 52-week low, once again becoming a '50,000 KRW stock.'

Why did the leading stocks collapse so helplessly? After careful consideration, I found two reasons. First, because Korean analysts do not issue sell reports, investors trust foreign sell reports. Unlike the domestic securities firms' reports, which are overwhelmingly buy recommendations, investors believed that foreign reports provided sincere information, so they were quick to sell SK Hynix and Samsung Electronics.

[Image source=Yonhap News]

Domestic analysts do not issue sell reports. They cannot do so because of the uproar. Investors' complaints are incessant, and the companies put pressure on securities firms. Since securities firms earn commissions from companies, it is not easy to issue reports that upset the companies.

Last April, the Financial Supervisory Service investigated whether an analyst who issued the first sell opinion on EcoPro was colluding with short-selling forces. The supervisory authority ordered that reports should break away from the overwhelmingly buy recommendations, but when a sell report was actually issued, an investigation began. This was enough to suppress analysts' analytical activities. At the time, the Financial Supervisory Service explained that the investigation was procedural due to complaints, but this proved how difficult it is to issue sell reports, as negative opinions led to complaints and investigations by the supervisory authority.

The second reason is the weakening of the domestic stock market's resilience. The reason a single foreign report caused a sharp drop in stock prices is that the buying power from individuals and institutions defending the market was weak. In other words, the domestic stock market's resilience is weak. In fact, even though global semiconductor companies recently received negative evaluations, only domestic companies experienced particularly large declines, which supports this point.

In conclusion, under the domestic securities firms' practice of issuing overwhelmingly buy recommendations, the influence of foreign reports issuing rare sell opinions has grown, and the domestic stock market's fragile constitution, unable to defend against fluctuations easily swayed by foreign investors' supply and demand, has fueled extreme volatility.

As the leading stocks falter, some cling to conspiracy theories, such as collusion with short-selling forces. However, although such suspicions have been raised several times in the past (e.g., Goldman Sachs on Helixmith, Citi Securities on Naver), no illegalities have been found. There are also suspicions of front-running. On the 13th, an order to sell 1.01 million shares of SK Hynix was executed at Morgan Stanley's Seoul branch just before the report was released, raising suspicions of front-running. However, the possibility of violating the Capital Markets Act seems low. For this to be true, there would have to be an assumption that the report was distributed first, risking penalties from Korean and U.S. regulators, to induce only the sale of SK Hynix shares, which is unnecessary. Moreover, even after the sell report, foreign ownership of SK Hynix remains at 54%.

If there are any illegal matters, they will be revealed, so we should move away from conspiracy theories and seek solutions based on the growing influence of foreign reports. Authorities and the industry must create an environment that guarantees analysts' independence so that sincere reports can be issued. Additionally, proper value-up initiatives should be promoted to improve the fragile constitution of the capital market. The fact that leading stocks become like falling leaves in the wind ultimately reflects the failure to establish a foundational strength in the capital market befitting the stature of the Korean economy.