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[Market Close-up] Stock market volatility spikes on concerns of second wave, foreign buying spree

A sign at the Korea Exchange shows the Tuesday's closing prices of two major stock indexes. (KRX)
A sign at the Korea Exchange shows the Tuesday's closing prices of two major stock indexes. (KRX)

Volatility in South Korea’s stock market rose this week on fears of a second wave of COVID-19 infections and return of foreign and institutional investors seeking to profit from undervalued stocks, analysts said Tuesday.

Just a day after the two main domestic stock indexes saw the biggest drop in three months, both spiked over 5 percent Tuesday, causing the bourse operator Korea Exchange to halt stock trading for five minutes in the morning. At the closing bell, Kospi surged 107.23 points, or 5.28 percent, to close at 2,138.05 while Kosdaq reached 735.38, up 42.35 points, or 6.09 percent, marking the biggest gain since March 25.

With the stock market experiencing a roller-coaster ride recently, the South Korean government, in a rare remark, said it would beef up its monitoring, citing risks posed by retail investors.

“The ongoing coronavirus pandemic and uncertainty about the real economy have dragged the stock market lower and even increased volatility in the foreign exchange market,” said Kim Yong-beom, Vice Minister of Economy and Finance, in a meeting with government officials and financial experts in Seoul.

“The government is paying keen attention to risks surrounding the domestic and global financial markets,” he added.

Among those risks are retail investors’ active participation in the stock market. He said individual traders’ participation in the stock market could cause the already volatile market to fluctuate more widely although their increased interest in stock investments has had some positive impact, reinvigorating the coronavirus-battered market.

“Financial volatility could further escalate down the road as businesses may need funds for running operations and paying off debts by the end of the second quarter and financial companies have to maintain certain financial stability levels, in addition to the potential volatility that can be triggered by the retail investors,” Kim said.

The government has been trying to minimize the impact of high volatility in the market, previously announcing that it would create a 1-trillion-won ($825 million) fund and ban on short selling to stabilize the local stock market during the virus crisis.

The move came after escalating fears on market volatility as the nation’s main bourse Kospi and tech-heavy, secondary Kosdaq fell 4.76 percent and 7.09 percent, respectively, on Monday, following drops in the Dow Jones Industrial Average and the Nasdaq composite last Friday. The Dow plunged 6.9 percent to close at 25,128.17 on the day while the Nasdaq slid 5.27 percent to 9,492.73.

The Tuesday rise was driven by the buying spree of foreign investors and institutional investors, who respectively bought 97.9 billion won and 473.2 billion won on the Kospi. Retail investors, who purchased 1.2 trillion-won-worth stocks a day before, were net sellers on Tuesday, offloading 577.4 billion won worth shares. Foreign traders bought 430.5 billion won, the highest amount on record, on the Kosdaq. Institutional investors purchased 79.6 billion won while individual investors sold 481 billion won.

“The weak US dollar and the reopening of the economy here could attract foreign investors to the local market,” Hah In-hwan, an analyst from Meritz Securities, said.

Some market analysts said market volatility will continue to linger for a while, but others forecast it will be able to recover despite some ups and downs, according to brokerages here.

“The local market will likely be exposed to a range of risks, such as a second wave of the virus and the nation’s worsening relations with North Korea,” said Han Dae-hoon, an analyst at SK Securities, adding “Those risks are quite a burden for the domestic market to gain new momentum at the moment.”

Some market watchers also forecast market fluctuations will not be as dynamic as before.

“Considering the amount of cash deposited in stock trading accounts and the US Federal Reserve’s stimulus measures, the market won’t reenter the bearish market as it did in March,” said Lee Eun-taek, an analyst at KB Securities, anticipating that the index may not fall more than 20 percent from its current levels.

Meanwhile, the government is reportedly pondering to impose sale taxes on shares and funds from 2023. Under the current rules, proceeds from selling more than 1 percent stake in a listed company or stocks worth 1 billion won are subject to the taxes. While levying the sale taxes on profits from stock trading, the government will likely reduce transaction taxes to attract funds to the stock market.

By Kim Young-won and Jie Ye-eun ( (