Analysis indicates that in the South Korean stock market, the stretch from the end of the Chuseok holiday through year-end has structurally disadvantaged KOSDAQ relative to KOSPI large caps. Over the past 20 years, KOSDAQ has outperformed KOSPI only five times in the post-Chuseok, year-end period.

However, past episodes of pronounced KOSDAQ outperformance shared three common conditions: a vacuum in large-cap leadership, a strong thematic driver, and net buying by foreign and institutional investors. This year, not all conditions are in place, but a new leadership group could form around semiconductor equipment and robotics, according to the outlook.

Na Seung-doo, an analyst at SK Securities, wrote in a report on the 21st: “It is true that from after Chuseok through year-end, the South Korean market has shown a more pronounced large-cap-led rally than KOSDAQ gains.”

Structural factors working against KOSDAQ at year-end

Since 2005, over roughly 20 years, KOSDAQ has beaten KOSPI in the post-Chuseok, year-end window only five times, including 2005, 2011, and 2017. Structural factors increasingly work against KOSDAQ as the year draws to a close.

First, individual investors who meet the major shareholder threshold often sell shares to avoid capital gains tax, weighing on KOSDAQ supply and demand. On top of that, dividend and window-dressing demand tends to concentrate in high-dividend large caps and KOSPI constituents. Window dressing refers to institutional investors tidying up their portfolios ahead of year-end book closing.

As a result, KOSDAQ’s seasonal strength has historically been more pronounced in January of the following year than at year-end.

Three conditions behind past KOSDAQ outperformance

Periods when KOSDAQ significantly outperformed KOSPI from after Chuseok through year-end shared common traits. In 2005, KOSDAQ posted a return 13 percentage points higher than KOSPI; in 2011, 5.5 percentage points higher; and in 2017, 19.3 percentage points higher.

YearKOSDAQ-KOSPI return gapLeading theme200513.0 percentage pointsStem cell, biotech20115.5 percentage pointsMobile gaming, entertainment201719.3 percentage pointsCelltrion trio, SillaJen biotech

Note: Return gap is KOSDAQ return minus KOSPI return from after Chuseok through year-end

The first condition was a vacuum in large-cap leadership. In 2005, foreign investors continued net selling of large caps. In 2011, the European financial crisis led to downward revisions in earnings forecasts for shipbuilding and chemical sectors. In 2017, profit-taking and fatigue following the semiconductor supercycle weakened large-cap upward momentum.

At the same time, a clear leadership theme formed around KOSDAQ’s top market-cap names. In 2005, biotech stocks rallied on stem cell plays. In 2011, mobile gaming and entertainment led. In 2017, the biotech theme centered on the Celltrion trio and SillaJen drove the market.

There were also shifts on the supply-demand front. Analysis shows that in the KOSDAQ market, where individual investors hold a high share, strong rallies emerged when foreign and institutional net buying flowed in earnest.

This year only half the conditions are met—semiconductor equipment and robotics in focus

This year, only some of the three conditions are being satisfied, according to the assessment.

The large-cap vacuum condition is roughly half met. Na said: “With the semiconductor cycle debate still ongoing since July, third-quarter earnings trends will likely have a major impact on the direction ahead.”

On KOSDAQ leadership themes, he left the door open. Momentum in the biotech sector, which occupies the top of KOSDAQ’s market-cap rankings, is not yet strong, but foreign investor interest is gradually building around semiconductor equipment and robotics.

The supply-demand condition has not yet been sufficiently met. However, if the South Korean government’s KOSDAQ revitalization policies draw in institutional funds, the environment could shift.

“Supply-demand conditions have not yet been sufficiently met,” he said, “but it is hard to let go of interest given the possibility that the government’s KOSDAQ revitalization policies could create an environment for institutional net buying.” He added: “That is why we need to pay attention to earnings and policy developments at major companies after Chuseok.”