South Korean stocks experienced a surge after regulators implemented a full ban on short-selling for a duration of about eight months. This move, which was deemed controversial, aimed to prevent the illegal use of a trading tactic commonly employed by hedge funds and other investors worldwide.
The ban is expected to appease retail investors who have voiced concerns about the impact of shorting, particularly in the lead-up to the April elections. However, it may discourage foreign investors and potentially impede MSCI Inc. from upgrading Korean equities to developed market status from their current emerging status.
The Kospi, the benchmark index, saw a significant increase of up to 4%, marking its highest jump since January 2021. Stocks that had recently experienced substantial short-selling positions, such as LG Energy Solution Ltd. and Posco Future M Co., were among the biggest contributors to the surge. Additionally, the small-cap Kosdaq Index recorded a surge of up to 5.9%, the most since June 2020.
On Sunday, the nation’s Financial Services Commission announced that new short-selling positions would be prohibited for equities on the Kospi 200 Index and Kosdaq 150 Index until the end of June 2024. These two indexes had previously seen the lifting of pandemic-era restrictions on short-selling in May 2021, while the ban had remained in effect for approximately 2,000 stocks.
The decision comes ahead of the general elections in April for the National Assembly in South Korea, where short-selling is viewed unfavorably by the public. Some ruling party lawmakers have urged the government to temporarily halt stock short-selling in response to demands from retail investors who have staged protests against the practice. However, it is important to note that institutional investors primarily conduct short-selling in South Korea.
Wongmo Kang, an analyst at Exome Asset Management, expressed skepticism about the policy reversal, deeming it unwarranted at the current time. Kang suggested that many people perceive it as a political move aimed at next year’s general election, emphasizing that the Korean market is heavily influenced by retail investors.
Earlier this year, the Kospi experienced a surge due to frenzied buying of electric-vehicle battery names and chip stocks related to the artificial intelligence theme. However, concerns over geopolitical tensions and high interest rates led to a reversal in the rally in recent months, causing the benchmark to undergo a technical correction and nearly wipe out its year-to-date gains.
The financial regulator stated that the market had been disrupted by “massive” naked short-selling conducted by global investment banks. Naked short-selling involves shorting shares without borrowing them first. The regulator is now seeking to implement improvements to ensure a level playing field for retail investors and impose stronger punishments for violators.
While regulators argue that naked short-selling hampers fair price formation and erodes confidence, some observers believe that broad outright bans make the market less transparent and therefore less appealing. Furthermore, these restrictions may hinder the market’s potential upgrade in MSCI indexes.
Gary Dugan, Chief Investment Officer at Dalma Capital Management Ltd., highlighted that the ban compromises South Korea’s market status and may impede its progress towards achieving developed market status. Dugan acknowledged that the immediate ban would likely cause a significant increase in stock prices for companies with substantial short-selling positions. However, he also noted that the impact might be limited due to the low levels of short positions in the overall market.
Exome Asset’s Kang expressed concerns that international investors might lose trust and opportunities in the Korean market as a result of the ban. Kang argued that without the ability for investors to express their views on mispriced markets and individual stocks, stock markets would lose long-term credibility on the global stage.
(Note: This story has not been edited by NDTV staff and is published from a syndicated feed.)
