Market News
Korean Stocks Drop 5% as Chip Slump Fuels Overheating Concerns - BLOOMBERG
BY Youkyung Lee and Sangmi Cha
(Bloomberg) -- Supercharged gains in a handful of companies and weak market breadth are stoking concerns that the world’s hottest stock market is overheating in some pockets.
Up 75% this year, the quick ascent of South Korea’s Kospi Index has largely been driven by Samsung Electronics Co. and SK Hynix Inc., which accounted for two-thirds of the advance. The surge reflects record profits at the chipmakers, and with valuations still below regional and global peers, some investors argue the rally lacks the excesses typical of past boom-and-bust cycles.
At the same time, signs of froth are building. Key market measures showing uneven earnings growth, rising volatility and record margin debt are beginning to give some investors pause. “This is a party you want to enjoy while staying near the exit,” said Mo Young, a portfolio manager at RootN Global Investors in Seoul.
The Kospi dropped nearly 5% on Tuesday, the worst performer across Asia, as chip stocks tracked US peers lower amid rising bond yields.
Here are four charts showing why the unease is building over the market’s rapid ascent:
Narrow Leadership
Market breadth, which shows the participation of stocks in any given move, is showing that the rally remains highly concentrated. Just 33% of benchmark stocks are now trading above their 50-day average, down from 70% three weeks ago. Meanwhile, 2% of members are hitting new 52-week high despite the Kospi’s successive records, which underscores the narrowness of the gains.
“In other words, buying the index is not simply buying a diversified slice of Korea; it is increasingly a concentrated bet on memory semiconductors,” said Christian Heck, a New York-based portfolio manager at First Eagle Investment Management.
“The index itself is no longer obviously cheap, and broad exposure requires underwriting a very large semiconductor-cycle bet,” he added. “Selectivity is essential.”
Speculative Small Stocks
With Samsung and SK Hynix posting record profits, signs of froth are emerging in smaller stocks where earnings growth is lagging. Non-tech firms have driven just 4% of the 12-month earnings gain since September, according to William Bratton, head of cash equities research for APAC at BNP Paribas.
Valuations are particularly stretched in materials sectors, which include electric-vehicle firms, trading at nearly 60 times forward earnings. Battery maker Posco Future M Co. stands out at over 300 times, despite carrying the highest number of sell ratings on the Kospi, Bloomberg data shows.
