KOSPI Volume Crashes to 500 Million Shares

With South Korea's stock market experiencing significant fluctuations between steep drops and rapid increases each day, investor confidence is beginning to wane.

As reported by the Korea Exchange on the 11th, the typical daily transaction amount in the KOSPI market for this month reached 504.49 million shares, representing the smallest monthly average so far this year. This reflects a drop of 42 percent when contrasted with the mean daily trade volume of 869.2 million shares observed between January and May. The average daily trading level hit a high of 1.10766 billion shares in March, followed by reductions to 947.18 million shares in April, 698.79 million shares in May, and now stands near 500 million shares this month.

A decline in trade volume, an essential measure of market liquidity, is clearly visible. Trade volume hit a high of 80.3325 trillion South Korean won on the 29th of last month and 74.33 trillion South Korean won on the 1st of this month, yet averaged only 46.2314 trillion South Korean won during the previous week (from the 4th to the 10th). Significantly, on the 10th, as the KOSPI fell 4.52% to 7,730.82 due to significant sales from foreign investors and institutional players, trade volume decreased to 39.9448 trillion South Korean won. Within a single week, the market's liquidity was reduced by more than half.

Behind the trend of investors holding back and taking a cautious stance are broader economic uncertainties and global political conflicts. On the 10th, the U.S. Department of Labor reported that the U.S. Consumer Price Index (CPI) increased by 4.2% compared to the previous year in May—the largest rise in over three years and one month driven by elevated fuel costs. This greatly reduced hopes for a reduction in interest rates by the U.S. Federal Reserve, leading to stagnation in the stock market.

Amidst the chaos, concerns about an all-out American conflict with Iran arose. On the 10th, U.S. President Donald Trump commented after a U.S. military helicopter was shot down, saying, "Iran will face consequences for delaying," and "We'll strike forcefully today. Talks have ended." Han Ji-young, a research analyst at Kiwoom Securities, noted, "The volatility index (VKOSPI) hit a new peak between 88-91, leading traders to halt transactions completely as part of their risk control measures." Analysts predict that the market will remain stable despite limited trade volume until mid-month, when international developments are anticipated to settle.

In the meantime, concerns about significant overpricing within the New York stock market are encouraging a worldwide approach of waiting and observing. As reported by Yahoo Finance, the "Buffett Indicator," calculated by dividing the overall value of the U.S. stock market by the yearly nominal gross domestic product, has recently climbed to 232.5%. This marks the highest point recorded since GuruFocus started gathering information from 1970 onwards. It indicates that the American stock market is currently 2.3 times bigger than the nation's annual economic production, categorizing it as being in a "significantly overpriced" range according to Wall Street measures. Past patterns show that reaching such an index level often means the U.S. stock market carries a substantial chance of experiencing poor performance during the following year.

Ben Snyder, an equity analyst at Goldman Sachs, mentioned in a study, "Traders are currently buying 'high-priced shares'—stocks having price-to-revenue multiples above 10 times—which have not been observed for many years. The previous time such excessive speculation occurred was during the 2000 internet boom."

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Bank Stocks Outshine Securities in Rising Rate Environment

With renewed worries about worldwide increases in interest rates, banking shares—which were previously ignored—are now attracting focus as safe-haven investments. Although market declines driven by semiconductors and higher long-term interest rates have hurt stock markets, bank stocks remain more stable under assumptions of potential gains from elevated interest rates.

◇Different performance of banking and stock market shares in June

As reported by the Korea Exchange, the KRX Bank Index increased by 3.18% this month, standing in stark contrast to the KOSPI's drop of 8.79%. Out of the 27 sector indexes monitored by KRX, just five—namely banking, consumer discretionary, insurance, financial services, and broadcast and communication sectors—gained value this month. This underscores the more resilient defense offered by bank stocks amid the market downturn.

Although the KOSPI declined by more than 4% and major semiconductor companies lost over 5% on the 10th, banking sector shares remained fairly stable. KB Financial Group decreased only 0.52%, while Hana Financial Group slipped 0.92%. Kbank and Jeju Bank rose by 4.3% and 14.6%, respectively.

On the contrary, the KRX Securities Index decreased by 8.6% during this month. Experts believe this is due to reduced growth in trade volumes as part of the KOSPI adjustment, along with investors cashing in their gains. Specifically, the average daily trading volume on the KOSPI dropped by around 200,000 shares, and the total transaction value fell by 3 trillion South Korean won from the previous month.

◇Rising interest rates: Benefit for banks, challenge for bonds

Market participants credit the differing performances of banking and securities sector stocks to current pressure from interest rates. Higher rates usually enhance expectations for banks' net interest margins (NIM), whereas securities companies encounter worries about potential losses in bond valuations and declining investor confidence.

Global monetary policy conditions continue to be beneficial for banking institutions. Ongoing worries about rising prices have led to renewed hopes for further increases in interest rates, mainly in the United States. On the 10th, the U.S. May Consumer Price Index (CPI) was reported to have increased by 4.2% compared to the previous year—its highest level in three years. This data reinforced beliefs that the Federal Open Market Committee (FOMC) meetings scheduled from the 16th to the 17th would keep interest rates unchanged instead of reducing them. David Kelly, head of global strategy at JP Morgan Asset Management, commented, "The Fed will still feel uneasy about inflation but probably won’t alter its approach. It’s highly likely that the FOMC will agree to maintain current rates during their upcoming session."

Ko Yeon-su, a researcher from Hana Securities, stated, "Due to expectations of two key rate increases during the latter part of the year, increasing interest rates have put pressure on stock markets." Heo Jae-hwan, leader of the global macro team at Eugene Investment & Securities, remarked, "During times when interest rates rise sharply, insurance companies perform better than banks, which in turn do better than securities firms."

◇Investment banks draw attention despite market fluctuations

Experts anticipate that the protective nature of banking sector shares will remain strong. In combination with ongoing high-interest rates, reduced anticipation of penalties associated with Hong Kong H-index equity-linked notes (ELS), and growing investor interest in consistent dividend returns amidst increased market instability are bolstering bank stocks. Their reliable income streams and dividends render them appealing choices during periods of financial uncertainty or when interest rates rise.

Na Min-wook, a researcher from DB Securities, stated, "Bank shares offer security amid uncertain times. We continue to favor bank stocks due to their solid defensive qualities, considering ongoing global challenges such as the U.S.-Iran conflict."

Nevertheless, the increasing value of the U.S. dollar presents a potential threat. The won has surpassed the 1,560 South Korean won level relative to the dollar for the first time in 17 years, prompting worries regarding financial institutions' capital sufficiency. Sustained elevated exchange rates might marginally lower main banks' Common Equity Tier 1 ratios, an essential indicator of fundamental capital.

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