iM Securities: Rotação Setorial de Ações Coreanas é Ilusão de Ótica, Líderes de Semicondutores Retomarão o Foco

iM Securities analyst Kim Jun-young stated in a report on the 6th that recent market expectations of sector rotation away from semiconductors into other sectors represent an optical illusion rather than genuine fund dispersion.

The report attributed the appearance of rotation to leverage ETF expansion causing disproportionate declines in Samsung Electronics and SK Hynix, while market capitalization excluding the S7 group (Samsung Electronics, SK Hynix, SK Square, Samsung Electronics preferred shares, Samsung Electro-Mechanics, Samsung Life Insurance, Samsung C&T) remained essentially flat.

Kim projected that semiconductor-centered earnings upgrades will ultimately lead to renewed concentration in leading stocks.

The analysis comes as Samsung Electronics and SK Hynix underperformed the broader market since late last month, creating expectations among investors that funds were rotating into previously neglected sectors.

S7 Stock Group Decline Shows No Genuine Fund Rotation

Kim stated that while the S7 stock group declined, KOSPI market capitalization excluding S7 remained essentially unchanged.

The analyst explained that the appearance of sector broadening resulted from leverage product expansion causing disproportionately large declines in Samsung Electronics and SK Hynix, rather than from funds moving from top-capitalization stocks to other sectors.

Kim added that funds exiting top stocks did not flow into other stocks, and predicted that even if Samsung Electronics and SK Hynix experience further corrections, the warmth of sector rotation will not be significant.

Leverage ETF Structure Amplifies Semiconductor Stock Volatility

The report identified leverage ETF expansion as a factor increasing volatility.

Kim explained that leverage ETFs repeatedly buy and sell underlying assets near closing to maintain target multiples through daily rebalancing, and that in Korea this scale has grown to exceed underlying asset trading volumes.

SK Hynix single-stock leverage ETF total assets reached US$ 19,4 bilhões, exceeding four times the daily average trading volume of US$ 4,5 bilhões.

Samsung Electronics leverage ETF scale stood at approximately 2,8 times trading volume, a structure significantly higher than US large-cap technology stocks.

Liquidity Metrics Fall to Pre-COVID Levels

Kim reported that credit balance and investor deposits relative to market capitalization have both declined to the lowest levels in recent years.

The analyst noted that while stock market scale expanded rapidly, sufficient new liquidity has not flowed in to support it.

Kim assessed that considering the Bank of Korea's interest rate hike stance and credit loan regulations, the domestic liquidity environment will not easily improve in the short term.

Analyst Forecasts Return to Semiconductor Leader Concentration

Kim projected that funds will ultimately concentrate again in sectors with improving earnings performance.

The analyst stated that semiconductor-centered earnings upgrades ultimately suggest renewed concentration in leading stocks, and that as factors shaking the stock market increase, the market will inevitably lean on leading stocks.

Kim forecasted that leading stock rallies will continue but volatility could expand significantly as liquidity supporting the market is insufficient.

The analyst described the current Korean stock market structure as high volatility and large-scale leverage products layered on top of thinned liquidity, warning that when volatility increases in a situation where individual investor deposits cannot keep pace with market cap growth, leverage ETF rebalancing volumes and margin call forced selling could overlap in the same direction, amplifying market shocks.

Kim concluded that high volatility will likely continue for the time being, and that as market difficulty increases, a leading stock-centered rally will ultimately reappear in the big picture.

FAQ

What did iM Securities analyst Kim Jun-young state about sector rotation in Korean stocks? Kim Jun-young stated in a report on the 6th that recent sector rotation expectations represent an optical illusion, as market capitalization excluding the S7 stock group remained essentially flat while Samsung Electronics and SK Hynix declined due to leverage ETF expansion rather than genuine fund dispersion into other sectors.

Why does the report predict funds will return to semiconductor stocks? The report projected that semiconductor-centered earnings upgrades will ultimately lead to renewed concentration in leading stocks, as the market will inevitably lean on leading stocks when factors shaking the stock market increase, despite higher volatility from thinned liquidity and large-scale leverage products.