Short selling record-high amid economic downturn

Short selling in the Korean stock markets hit an all-time high in July, as a lackluster economy fueled investors’ pessimism.

According to main bourse operator Korea Exchange, the average daily short selling in July totaled 431.8 billion won ($370.9 million) in the benchmark KOSPI and tech-laden KOSDAQ, having doubled year-on-year from 206.7 billion won. This is the highest recorded since KRX started booking the data in January 2008.

By bourse, the daily shorts in KOSPI averaged 367.9 billion won in July. Investors mostly targeted KOSPI heavyweights with a high sensitivity to the global economy.

Samsung Heavy Industries Co., a Samsung shipbuilder, reported a short sell of 16.7 percent in its trading volume in the January-July period. Hotel Shilla, Hyundai Heavy Industries Co., Hite Jinro and S-Oil also reported short sells of 12.4 to 14.3 percent, in reflective of investors’ expectations of thinner profit.

KOSDAQ’s daily average shorts also rose to 63.9 billion won. 

Short selling is a trading technique in which investors “borrow” stocks from brokerages’ inventory and sell them, on the belief that share prices will fall soon. The sellers must “close” the short by buying back the same number of shares and returning them to the brokerages. If the price drops, the sellers can buy back the stock at the lower price and make a profit on the difference. But if the stock rises, the buyback requires larger costs, leading to losses for the sellers.

An increase in short selling points means that more investors are betting on an economic downturn in the near future.

Short selling has sharply increased since last year, as the economic downturn at home has dwarfed expectations of conglomerates’ yearly performance. Expectations that the Federal Reserve will raise the key interest rate this year, in September at the earliest, has also pointed to a looming economic downturn in Korea.

By Chung Joo-won (joowonc@heraldcorp.com)