Rebalancing Effects Have Yet to Be Reflected

The author is an analyst of NH Investment & Securities. He can be reached at gilbert.choi@nhqv.com. -- Ed.

 

Regular rebalancing events are scheduled for both the Kospi200 and Kosdaq150 in June. This time, however, methodology changes are to be in effect. Given the recent market turmoil upon the outbreak of Covid-19, we believe that rebalancing effects have yet to be reflected in earnest.

Active capital yet to reflect regular rebalancing events

Kospi200: We predict that the number of constituent replacements at the upcoming rebalancing event will be the highest in three years. According to our analysis, 12 constituents will be changed and the sharp rise in replacements, which will mainly stem from a revised rebalancing methodology, will likely result in clear regular rebalancing effects. That said, given the recent market turmoil due to Covid-19, it appears that active capital inflow targeting rebalancing has been somewhat limited thus far.

We note that SK Biopharm is not included in our analysis, as the firm’s IPO timetable has yet to be fixed. However, assuming that its IPO is completed in May, the stock will likely be eligible for special inclusion at the time of the June rebalancing.

Kosdaq150: The Kosdaq150 methodology is to be amended, as well. The planned change aims to ease the concentration on biotechnology stocks. We expect 14 replacements to be made. As the financial sector is to be newly included in the Kosdaq150 universe, we advise paying attention to financial stocks.

The impact of regular rebalancing on the share performance of Kosdaq150 stocks tends to be more evident than that for Kospi200 stocks. However, it appears difficult to decide on the timing of investment, considering greater investor awareness of regular rebalancing and mounting market volatility. Considering upside potential based on YTD share performance, we like tech stocks.

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