South Korean retail investors are cycling through meme stocks so quickly that it’s alarming regulators.
(Bloomberg) — South Korean retail investors are cycling through meme stocks so quickly that it’s alarming regulators.
In the span of eight weeks, they’ve driven short-lived rallies in the superconductor, salt and seafood sectors, following a months-long frenzy over anything related to EV batteries. The risks of margin calls is high, and leverage is worrying, Goldman Sachs Group analysts said.
That prompted the Financial Services Commission to put meme-stock risk management among its top priorities earlier this month, vowing to take stern actions on the disruptions and step up monitoring on rising margin loans. The Korea Exchange, too, has flagged the risks of chasing gains in what are locally known as “theme stocks,” with strategists warning about the sheer pace of changes.
“Their life span is getting shorter, even changing directions within the same day,” said Cho Junkee, a market analyst at SK Securities Co. “There is a limited supply of money into these thematically-driven stocks, so there is a rotation from one theme to another.”
Read: Superconductor Stock Frenzy Sparks ‘Heaven and Hell’: Tech Watch
The craze helped the small-cap Kosdaq index become one of the world’s best performers among those tracked by Bloomberg. But, margin loans for the gauge have increased by 27% this year, and in absolute terms are at nearly the highest level in history, Goldman analysts including John Kwon and Timothy Moe wrote in a note.
“We think margin-call risks are still high for retail-focused activities,” they said. Still, “retail flows may continue given increased interest and higher deposit levels in brokerage accounts since the Covid outbreak.”
There are signs though that the churn is getting excessive.
In late July, some Korean researchers claimed to have discovered a room-temperature superconductor called LK-99, sparking days-long rallies in stocks such as Shinsung Delta Tech Co.
As other scientists debunked the claim, meme stock lovers piled into equities seen as related to MXene after a new study ignited interest in the inorganic compound. When the theme fizzled out in less than a week, investors flocked to salt and then seafood alternative stocks as the news of Japan’s release of Fukushima wastewater grabbed headlines.
“I’ve done short-dated trades every day for more than a year and a half,” said Song Young Min, a 27-year-old day trader in Seoul. “Even I felt like this month’s meme stock frenzy was a bit too excessive.”
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