Economist advises rebalancing amid supply-demand paralysis in Korean market

Economist Hong Chun-uk has advised investors to consider rebalancing rather than bottom fishing as the Korean stock market faces a supply-demand imbalance and leverage liquidation. While the National Pension Service became a net buyer on October 30, individual investors remain stuck with cumulative net buying of approximately 170 trillion won from near-peak levels.

As anxiety grows among investors due to recent sharp declines in the KOSPI and KOSDAQ, analysis suggests that responding from an asset allocation perspective is necessary rather than attempting to predict the market bottom. Economist Hong Chun-uk analyzed the recent downward trend in the Korean stock market as a process of supply-demand imbalance and leverage liquidation, advising that now is a time to consider rebalancing according to asset allocation models rather than exiting the market.

"There is no bottom fishing"... The reality of the supply-demand tangled Korean market

The biggest problem with the current Korean stock market, according to Dr. Hong Chun-uk, is that the supply and demand are completely tangled. The purchasing strength of the National Pension Service, which was expected to act as a "relief pitcher" for the market, is very weak compared to the low-price buying strength seen during the 2008 global financial crisis or the 2020 COVID-19 pandemic. While it is a fact that the National Pension Service turned into a net buyer starting from the end of last month (October 30), the analysis suggests that conditions are not sufficient to perform active rebalancing.

The situation for individual investors is also difficult. With the cumulative net buying amount of individuals—who purchased near the peak when the KOSPI was above 7,000 points—reaching approximately 170 trillion won, a strong sentiment to dump holdings during rebounds has emerged as the market falls into panic, preventing low-price buying momentum. In fact, customer deposits, which measure market liquidity, showed contraction, shrinking to 89 trillion won recently. Ultimately, the explanation is that the power of pension funds to absorb selling by foreigners is weak, individuals are stuck at high points, and even the buying power of corporations (general legal entities) is hitting a limit of at most 300 billion to 400 billion won per day, leaving the supply and demand completely paralyzed.

U.S. midterm elections excuse is merely 'bear market psychology'

Regarding the influence of the U.S. midterm elections discussed in the market, Hong presented a cold perspective. He pointed out that trying to find unclear reasons whenever the market falls is "bear market psychology." Despite the fact that the 10-year U.S. Treasury yield showed stability, falling 0.5 percentage points from 5.3% to 4.8% recently, he noted that the market is looking for excuses to fall because investor sentiment has become extremely vulnerable.

He emphasized that current volatility should be viewed from the perspective of "leverage liquidation" rather than specific political events. The analysis suggests that as hedge funds and large investors who placed bets with excessive leverage are liquidated, the fear index surges, leading to a flow of chain-reaction stop-loss selling. He added that the psychological shock caused by the shaking of the belief that "AI investment is eternal"—the growth story of the AI industry led by NVIDIA—is shaking the market. Regarding the U.S. midterm elections, his view is that while the House may see a "divided government" where the Democratic Party is likely to win and could check former President Trump's policies through budget authority, this cannot necessarily be seen as bad news for the market.

"If it is panic, it is time to buy"... Rebalancing based on asset allocation

What attitude should investors take in such a market? Hong cautioned against the impossible mission of bottom fishing, asking, "Who knows whether the stock price is at the bottom or not?" Instead, he suggested that if the market is in a state of panic, one should move according to an asset allocation model. He clarified that this is part of an asset allocation strategy, not simple speculation, stating, "Judge whether the market is cheap or in panic, and if it is panic, you should buy."

In fact, Hong explained that rebalancing signals have been detected since October. At that time, the most promising assets were gold and U.S. bonds, and as of today, a rebalancing signal has appeared in Korean stocks as well. He advised, "This is a time to endure a little more rather than exiting the stock market," suggesting that investors holding bonds, gold, or dollar assets can use assets that have risen in price to take advantage of low-price buying opportunities. Furthermore, he emphasized that the correct attitude for an asset allocation investor is not simply watching the market, but maintaining positions and approaching with a split-purchase perspective when extreme sell signals appear.

Source: original video (YouTube)