KOSPI plunges 40% from its high point... Global IB's mixed stock market diagnosis

June intraday high from 9385.59 to 5554.22… The two major market circuit breakers, JP Morgan and HSBC, maintain increased proportions... Warning of lack of momentum for buying lows and short squeezes

While KOSPI has fallen more than 40% from its all-time high, a temperature difference is also appearing in the outlook for the Korean stock market by global investment banks (IBs). While they highly evaluate the mid- to long-term growth potential centered on artificial intelligence (AI) semiconductors, they are cautious about the supply and demand conditions that will support a short-term rebound.

On the 15th, KOSPI ended trading at 5554.22, down 454.59 points (7.57%) from the previous trading day. KOSDAQ also closed at 760.82, down 63.06 points (7.65%).

During the day, both markets plunged more than 8%, triggering the first stage circuit breaker. The Korea Exchange suspended trading in the KOSDAQ market at 12:23 p.m. and the KOSPI market at 12:38 p.m., respectively, for 20 minutes. Earlier in the morning, a selling sidecar was activated in the two major markets.

KOSPI rose to an all-time intraday high of 9385.59 on June 19, but the closing price on that day was 40.82% lower than that. It fell by 3831.37 points in about 4 months. Compared to the all-time closing price of 9114.55 on June 22, it fell 39.06%.

Samsung Electronics fell 9.48% and SK Hynix fell 11.06%, dragging the index down. Even in a situation where semiconductor companies' profit growth prospects are maintained, uncertainties surrounding AI investment profitability and global funding flows are putting pressure on stock prices.

#### A sharp decline that Goldman Sachs also paid attention to... Prolonged selling by Foreign Investors

Goldman Sachs assessed that KOSPI's recent continuous decline and cumulative decline greatly exceeded the general adjustment phase. He presented the early stages of the spread of COVID-19 in 2020 and the time of the U.S. credit rating downgrade in 2011 as examples of comparison, and explained that in the past 20 years, cases of rapid selling without technical rebound have been rare.

Foreign selling continued throughout this year. According to the Korea Exchange, Foreign Investors sold net 204.879 trillion won in the KOSPI market as of the 14th of this year. During the same period, individuals net purchased 100.171 trillion won, and institutions net purchased 39.61 trillion won. Even with the purchases by domestic investors, it was not enough to absorb the selling volume from Foreign Investors.

Foreign selling continued on the 15th. On this day, Foreign Investors engaged in large-scale net selling in the KOSPI market, and the index fell by more than 7% despite purchases by individuals and institutions.

In particular, selling pressure was concentrated on large semiconductor stocks such as Samsung Electronics and SK Hynix. Although predictions of rising memory prices and supply shortages of high-bandwidth memory (HBM) remain, doubts are growing over whether the massive investments being made in AI infrastructure can lead to actual profits.

#### Maintaining overweight despite the slump... Weighing on AI semiconductor profit growth

JP Morgan maintained its overweight opinion on the Korean and Taiwanese stock markets in its Asia-themed strategy report 'Why AI remains foremost' published on the 12th.

JP Morgan predicted that AI-related stocks will account for more than 50% of the Asian stock market index and will account for about 70% of the increase in profits of Asian companies in 2027. It is predicted that supply shortages in major AI hardware fields such as advanced logic semiconductors, packaging, semiconductor equipment, and HBM will continue until at least 2028.

Korea is competitive in memory and HBM, and Taiwan is competitive in advanced logic semiconductors and packaging. JP Morgan's view is that if demand for semiconductors continues due to increased AI investment, related companies will be able to increase production and maintain price negotiating power.

HSBC Private Bank also suggested a moderate overweight on Korean technology stocks in its September investment outlook. The main reasons cited were memory supply shortage and corporate profit growth. Korea was also included as one of the preferred global stock markets in the fourth quarter investment outlook.

The reason the two organizations maintain a positive outlook is due to corporate performance. Even though stock prices have recently plummeted, Korean companies still have room for profit growth if demand and supply shortages for AI semiconductors continue.

#### Lack of momentum for buying lows and short squeezes… Conditions for return to Foreign Investors

Two days later, another strategy team at JP Morgan expressed cautious opinions about a short-term rebound. In the 'Flows & Liquidity' report published on the 14th, the global market strategy team led by strategist Nikolaos Panigirzoglu warned that this adjustment in AI infrastructure-related stocks is taking place in a supply and demand environment that is more unfavorable than the past sharp decline.

According to the report, in past corrections, individual investors' buying at low points and liquidation of short selling positions contributed to the rebound in stock prices. This time, it is difficult to expect the same effect as buying power through Korean stock-related ETFs is limited and short selling positions are low.

There was no significant change in the short selling position of EWY, a US-listed ETF that tracks the Korean stock market, in October. Short selling positions in U.S. memory companies and major semiconductor ETFs also remained at low levels. Even if stock prices rebound, the short squeeze effect, in which stock repurchases by short sellers increase the increase, may be limited.

Leveraged ETFs were also mentioned as a burden factor. This is because if the stock price falls significantly, additional selling may occur during the process of adjusting the leverage ratio.

Domestic individual investors' net buying in the spot market and the lack of ETF buying power pointed out by JP Morgan are separate issues. What JP Morgan looked at was not the trading trends of all domestic individual investors, but the fund flow and short selling positions of overseas listed ETFs.

Changes in the proportion of inclusions are also confirmed in JP Morgan Asset Management's Korean stock fund. The combined proportion of Samsung Electronics and SK Hynix decreased from 22.66% at the end of July to 18.58% at the end of August. Samsung Electronics decreased from 10.91% to 8.80%, and SK Hynix decreased from 11.75% to 9.78%.

Since the proportion of inclusion is also affected by changes in the stock price and the value of other stocks, this figure alone cannot tell the actual scale of sales. It is difficult to directly connect the operation status at the end of August with foreign sales on the 15th.

There is a difference in the investment time horizon of JP Morgan's two reports. The report on the 12th focused on the mid- to long-term profit growth of AI semiconductor companies, and the report on the 14th focused on the lack of buying power to support a short-term rebound.

Domestic securities firms are paying attention to corporate performance and external uncertainty regarding when foreign supply and demand will turn around. Hyundai Motor Securities presented the performance announcements of Samsung Electronics and SK Hynix at the end of October and the U.S. midterm elections on November 3 as major turning points.

Kim Jae-seung, a researcher at Hyundai Motor Securities, said that geopolitical risks in the Middle East and uncertainty about the results of the U.S. midterm elections are limiting Foreign Investors' risk preference, and noted the possibility that uncertainty will ease after the election.

Hana Securities suggested that in the past KOSPI bull market, the U.S. manufacturing economy, prices, and the difference in interest rates between Korean and U.S. government bonds moved ahead of foreign purchases. The Institute for Supply Management (ISM) manufacturing index was found to be ahead by about 1 month, the core personal consumption expenditures (PCE) inflation rate was ahead by about 5 months, and the difference between Korea-US 10-year government bond interest rates was found to be ahead by about 2 months.

The preceding time difference of the past does not apply the same this time. To determine whether to switch to foreign purchases, one must look not only at corporate performance but also at financial conditions such as interest rates and exchange rates.

Maintaining an overweight opinion on Korean stocks and foreign investors starting to buy them right away are two different issues. Even if the profit growth of AI companies expected by global IBs is confirmed through actual performance, the supply and demand burden on the domestic stock market may continue if interest rates, investment sentiment, and global fund allocation do not change.