[News Focus] Tech super cycle dwarfs NK tension, snubs small cap shares

The record-high closure of South Korea’s main bourse this week appeared to prove once again that foreign appetite for the market’s tech giants amid a global tech super cycle tends to precede uncertainties from geopolitical tension.

Some analysts also highlighted the contrasting trend of large and small cap shares.

The main bourse Kospi on Thursday extended a record streak for two days, closing at 2,474.76, up 0.68 percent from Wednesday.

On Wednesday, the Kospi hit an all-time high, 2 1/2 months after it closed at its previous record of 2,451.53 on July 24. The market cap of the Kospi came to 1,829.2 trillion won ($1.61 trillion) as of Wednesday, according to the market operator Korea Exchange.

From Tuesday, when the market resumed after a 10-day break for national holidays, the composite index jumped 3.4 percent in three days, while foreign investors net bought Kospi stocks worth 1.8 trillion won.

Over the cited period, tech juggernauts such as smartphone maker Samsung Electronics and semiconductor maker SK hynix gained 6.9 percent and 6.8 percent, respectively. LG Electronics advanced 6.7 percent.

The rally came in line with Wall Street’s record performance. All three major US indexes -- S&P 500, Dow Jones industrial average and the Nasdaq composite -- ended at record-highs Wednesday on optimism toward the release of upbeat third-quarter earnings that prompted gains of US tech shares such as Visa, Paypal and Alphabet.

The revived record rally indicated that the impact of North Korea’s nuclear test on the market tends to last temporarily.

A month after the North’s hydrogen bomb test on Sept. 3, the Kospi gained 3.23 percent as of Tuesday. On Oct. 3, the market was closed for holidays. In the cases of the five previous nuclear tests, three led the index to soar a month later -- by 4.6 percent in November 2006, 2.9 percent in March 2013 and 0.78 percent in October 2016.

The latest Kospi record run warrants “the start of a second phase of (Kospi’s) upward drive,” backed by strong macroeconomic fundamentals, wrote Lee Kyoung-min, an analyst at Daishin Securities.

“It is a chance to invest in more Kospi stocks, if markets begin to digest the impact of North Korea risks and US’ pressure on the trade deal,” Lee wrote. This comes in contrast to previous concerns that the market’s 10-day break -- the longest in over three decades -- would bring about an unexpected market change amid the heightening geopolitical tension on the Korean Peninsula due to the war of words between North Korea and the United States.

Meanwhile, analysts said the Kospi rally only benefited large cap stocks, while giving small cap shares in the market the cold shoulder.

As of Wednesday, Korea’s main bourse LargeCap index rose 5.3 percent from a month prior and 18.9 percent from six months before, while its SmallCap index fell 2.7 percent in a month and 2.9 percent in six months.

Jung Hun-seog, an analyst at Korea Investment & Securities, wrote in a report that North Korea’s latest provocation hampered small cap stocks’ recent growth momentum, including an 8-day winning streak in late August, overshadowing expectations of President Moon Jae-in’s policy drive to nurture and support small and mid-sized companies. 

“‘Korea Discount’ resurfaced due to (North Korea’s) sixth nuclear test, empirically reminding investors that small cap stocks are more vulnerable to the North Korea risk than large cap shares,” Jung wrote. “When it comes to a share’s return, the gap between large cap and small cap has been extraordinarily widened.”

By Son Ji-hyoung (consnow@heraldcorp.com)