Blind Faith
The South Korean stock market is being repeatedly jolted by foreign securities firms’ reports.
On August 13, Goldman Sachs advised investors to sell Hanmi Pharmaceutical shares and the stock price of the company dropped as a result. The next day, individual investors sold their shares in quantity. Still, foreign investors net-bought Hanmi Pharmaceutical shares on August 14, raising the price 0.71%.
This pattern has been repeated over and over. Following a pessimistic report from a foreign investment bank such as Morgan Stanley and Goldman Sachs, foreign and institutional investors, which are more accessible to such reports, sell their shares in quantity. Then, taken aback and incurring losses, individual investors follow suit.
Still, questions remain about whether such reports are reliable enough. At present, American and British analysts cover only a small number of South Korean companies in the local stock market and most of those reports are actually written by South Korean analysts who worked for South Korean securities firms before moving to foreign investment banks’ research centers. Investors ignore local securities firms’ opinions but things change when the same opinions are provided by foreign firms.
Notably, a pessimistic report on a stock tends to cause an increase in short selling. Recently, short selling drastically increased for Celltrion immediately before Goldman Sachs, which had a large portion of the company’s short selling balance, released an extremely pessimistic report on it. In that report released on August 13, Goldman Sachs halved its target stock price for Celltrion. That day, institutional and foreign investors net-sold Celltrion shares worth a total of 14.9 billion (US$13.4 million) won and 8.2 billion won (US$7.3 million), respectively.
Likewise, Morgan Stanley released a similar report on the semiconductor sector on August 10, and then institutional investors sold semiconductor company shares worth no less than 280 billion won (US$252 million), including those of Samsung Electronics worth 190.4 billion won (US$171 million) and SK Hynix worth 87.7 billion won (US$78.9 million). In addition, foreign investors’ net selling in the two companies amounted to 133 billion won.
In short, local institutional investors are more sensitive than foreign investors to foreign IB reports, and this is a typical example of local institutional investors’ blind faith in foreign securities firms. “Stock price fluctuations attributable to foreign IB reports are something that has been repeated over and over, but the impact is increasing these days,” said an anonymous local stock analyst, adding, “In the end, it is individual investors without access to such reports that suffer losses.”
The blind faith is because of a belief that analysts at foreign securities firms are better at enterprise analysis than local experts. However, it should be looked into how the analysts produce their reports.
Details of the reports are handled mostly by foreign IB analysts who previously worked for South Korean securities firms’ research centers. In most cases, the role of foreign analysts at the headquarters located in the US and Hong Kong is limited to directional guidance as they are not well aware of specific issues. This means global investment banks’ trading strategy is thoroughly reflected during the report production process. Although global investment banks are stressing their so-called Chinese walls, it cannot be completely relied upon. On August 2, UBS and Credit Suisse stopped their research coverage for South Korean banks, jolting the bank sector of the local stock market. Some people said that the future of local bank stocks is gloomy to such an extent. It has been found out, however, that the bank stocks have no problem and the stopping of the research coverage was because of the investment banks’ shortage of personnel.
Short selling is another dubious part. Celltrion is a typical victim of a pessimistic report from a foreign securities firm. In the company, the short selling balance is held mostly by foreign investment banks such as Credit Suisse, Citigroup, Merrill Lynch, Morgan Stanley and Goldman Sachs. They suffer losses when the stock price of the company rises and, as such, it is unlikely for them to come up with an optimistic report. It is in this regard that local analysts are suspicious about Goldman Sachs’ report on Celltrion released on August 12.