Will KOSDAQ Revive This Year? "A Market for Small and Mid-Cap Stocks Is Coming"

KOSDAQ Expands Gains This Year
If Recovery Becomes Clear, Pay Attention to IPOs
Focus on Liquidity Growth Compared to Exports

There is growing interest in whether the KOSDAQ market can recover from last year's decline this year. Securities firms predict that the KOSDAQ market is likely to mean-revert from a quantitative analysis perspective, and the macroeconomic environment is expected to be more favorable for mid- and small-cap stocks than for large-cap stocks.

According to the Korea Exchange on the 17th, the KOSDAQ index closed at 724.24, up 12.63 points (1.77%) from the previous trading day, marking a 6.8% increase since the beginning of the year. This performance surpasses the KOSPI, which rose 5.1% during the same period. After suffering a severe slump last year with a 21.74% drop?worse than the KOSPI's (-9.63%)?the KOSDAQ appears to be attempting a rebound this year.

Securities firms forecast that the KOSDAQ could partially recover last year's losses from a mean-reversion perspective. Min-gyu Kim, a researcher at KB Securities, noted, "Last year's decline in the KOSDAQ was the third largest in the past 20 years. When calculating past returns to see how much rebound occurred the following year after such a significant drop, the maximum increase from the beginning-of-year index to the yearly high reached 39.5%."

If the KOSDAQ market sentiment truly revives, attention should be paid to initial public offering (IPO) stocks, Kim said. He explained, "Recently, the first-day prices of newly listed stocks have often fallen below the offering price. However, during periods when the KOSDAQ returns rose in the past, the first-day returns of newly listed stocks also improved. Assuming an improvement in the KOSDAQ index, there will be opportunities in newly listed stocks as well."

Considering changes in the macro environment this year, some analyses suggest focusing on the KOSDAQ as mid- and small-cap stocks are expected to outperform large-cap stocks. Dong-gil Noh, a researcher at Shinhan Investment Corp., stated, "Since 2005, in the domestic market, when liquidity increases faster than exports, mid- and small-cap stocks should be emphasized, whereas when exports increase faster, large-cap stocks should be the focus. In fact, during 2017?2018, the KOSDAQ rose beyond fundamentals amid increasing domestic liquidity, but in 2022, it performed poorly due to rising inherent risks from U.S. interest rate hikes."

Noh further predicted that liquidity growth will outpace export growth this year. He said, "The difference between Korea's broad money supply (M2) growth rate and export growth rate turned positive at the end of last year, while export growth has stalled. Especially in the first half of this year, accommodative monetary policy is expected due to expanding domestic political and economic risks." He added, "The macro environment is increasingly likely to support mid- and small-cap stocks, so now is the time to consider portfolio adjustments."