Leverage Reduction and Foreign Buying Stabilize Korean Stocks; Semiconductors and Cosmetics ODM Lead

Recently, leverage in the Korean stock market has fallen to around 5 trillion won, and market volatility has declined sharply. This means the authorities' target of reducing leverage is nearly achieved. Analysts say that as leverage declines, the tail-wagging-the-dog effect weakens and the market has become more predictable.

Such large buying appears to have contributed to reversing the overall market mood.

This suggests a renewed interest and new investment in Korea's electrical and electronics industry.

Although the overall index rose sharply, there were far more declining stocks than advancing ones. This means large-cap stocks drove the market higher, while small and mid-sized stocks, and companies below mid-cap size, actually fell. As a result, analysts say the index gain did not lift all stocks evenly.

SK Hynix is a major buyer capable of purchasing bonds in trillion-won units, so a reduction in its role in the bond market could have considerable ripple effects.

If the company buys 2 to 3 trillion won in bonds instead of returning about 1 trillion won a year to shareholders, it could send the message that it has cash to spare but nothing to give. Unlike in the past, Korean shareholders now take a deep interest in corporate governance and management, not just speculation, so ignoring their demands could lead to serious governance problems. SK Hynix executives need to clearly convey these shareholder voices to headquarters.

Their revenue and operating profit have risen significantly year on year, and Cosmax in particular has hit an all-time high, with its share price performing very well. This shows that the growth of K-beauty and the technology and production capacity of ODM companies are gaining recognition in the global market.

This is an important development showing that global institutional investors' interest in Korea's leading semiconductor companies is growing.

They must go through several steps, including opening a foreign-only bank account, opening a linked securities account, registering the securities account, and registering a proxy. These complex procedures act as a barrier to foreign capital inflows. Although the measures are meant to track fund flows clearly, they also raise entry barriers and hinder the revitalization of the Korean market.

A perception is spreading that Korea's leading stocks, especially memory semiconductors, are undervalued. Many analysts argue that Korean semiconductor stock prices fell because domestic investors' buying capacity has reached its limit. Therefore, inflows of foreign buying are now urgently needed. To attract foreign investment, an environment must be created where Korean stocks can be bought as easily as US stocks, through an integrated account system and agreements with foreign brokerages. The reason the Korean stock market can no longer rise is that there are no more buyers left domestically, and in an undervalued situation, the fastest path to fund inflows is to revitalize foreign investment.

Most of the roughly 3 trillion won in purchases were concentrated in the electrical and electronics sector. This suggests that if foreign capital keeps flowing in on the view that Korean stocks are undervalued, share prices could continue to rise as they did today. Whether foreign inflows continue is likely to be a key variable for the Korean market going forward.

To avoid delisting when penny stocks fall below 1,000 won, some companies are rapidly carrying out share consolidations (reverse stock splits). This move is expected to contribute to improving the structure of the Korean stock market. The more actively the exchange works to clean up the market, the higher its transparency and soundness become, which in turn could encourage foreign investor inflows.

The policy is known to include additional dividends and share buybacks and cancellations, up to 50% of free cash flow. Accordingly, articles are emerging that capital could flow out of the bond market if SK Hynix focuses on shareholder returns instead of buying bonds. This suggests the company's fund management will focus more on enhancing shareholder value than on the bond market.

Korean shareholders are no longer merely speculators and take a deep interest in how companies are run, and this must be recognized. Accordingly, a shareholder return policy that meets investor expectations is emerging as a core challenge for the SK Group.

Accordingly, MLCC-related stocks such as Samsung Electro-Mechanics rose sharply in today's Korean market. The rise is seen as reflecting expectations that MLCC demand will surge along with AI technology development.

This investment is expected to continue for several years, and 2028 is projected to be a point when market conditions should be closely watched. Data center expansion is expected to have a major impact on related IT infrastructure and component industries.

In China, listings of advanced technology companies such as CXMT, SMIC, Moonshot, DeepSeek, and Unitree are pouring in. Overall stock market returns are ultimately determined by supply and demand, and if so many companies list, the oversupply of shares could drag down overall market returns. One reason the Korean stock market has moved sideways around 2,000 points over the past 20 years is that listings have occurred every year, and even though the KOSDAQ's market capitalization has grown more than tenfold since 2000, share prices have not risen because the number of listed companies has also grown more than tenfold. China's market is now facing this situation, so investors see Korea as a far more attractive destination than China.

From 2025, Korea's earnings consensus is expected to be overwhelmingly high. This means the Korean stock market is entering a very good period to attract foreign capital. Now that it has been confirmed that domestic funds alone can no longer push share prices higher, foreign capital inflows are emerging as an essential factor for Korea's market rise. The government and related institutions must devote their full efforts to institutional improvements, such as introducing an integrated account system to attract foreign investment.

Looking at profitability charts for China and emerging markets, the situation is not good. There are claims that newly formed companies such as Unitree are making money, but there are clearly listings driven by government intervention. If many companies list this way, it will be hard for the overall returns of Chinese listed companies to improve. In particular, the fact that CXMT, a newly IPO'd company, has ranked first in Chinese returns with a market value of 600 trillion won appears somewhat abnormal. This suggests China's market is no longer as favorable to investors as it once was.

Among the entities holding the stock at the time of listing, many were local governments, effectively taking the form of a state-owned enterprise. This can be interpreted as the state selling shares to the public at inflated prices. Such a governance structure is not attractive to investors, no matter how high the dividends (in fact, many Korean companies pay considerably higher dividends). One important way for Korea to gain a competitive edge over China is to establish sound governance by enhancing the transparency and vitality of its financial market.