Gloomy KOSDAQ Lags 73% Behind KOSPI... Worst Performance Since Launch

While the KOSPI rose 62% this year,
the KOSDAQ fell by 11%
The largest gap since the launch of the KOSDAQ in 1996
"Accelerate the removal of insolvent companies and introduce the promotion-relegation system"

This year, the performance gap between the KOSPI and KOSDAQ has widened to over 70%. Since the launch of the KOSDAQ in 1996, there has never been such a large disparity in returns between the two indices. Experts are suggesting that, in order to revive the severely undervalued KOSDAQ market, it is necessary to accelerate the removal of insolvent companies and to design the planned KOSDAQ promotion and relegation system with greater precision.

While the KOSPI surged 62%, the KOSDAQ declined by 11%

According to the Korea Exchange on September 2, the KOSPI has risen 62.2% so far this year as of the previous day. In contrast, the KOSDAQ has dropped 11.2% during the same period, resulting in a gap of up to 73% between the two indices.

In a typical bull market, both KOSPI and KOSDAQ move in the same direction, but this year the Korean stock market has been led predominantly by the KOSPI, leading to an extreme neglect of the KOSDAQ.

The gap has widened as market leaders Samsung Electronics and SK hynix have driven the KOSPI. The onset of the artificial intelligence (AI) era has boosted the earnings of memory semiconductor companies, causing capital inflows to concentrate on these stocks. Even though they had previously fallen from their highs, SK hynix and Samsung Electronics still posted year-to-date gains of 153% and 111%, respectively. Furthermore, with the launch of single-stock leveraged exchange-traded funds (ETFs) for Samsung Electronics and SK hynix at the end of May, it is noted that more capital flowed into the KOSPI market.

Some analysts note that the underperformance of the KOSDAQ cannot be explained by weak earnings alone. Mirae Asset Securities identified the fundamental causes as the growing number of insolvent companies and weak supply-demand conditions in the market.

Jae-Hong Yoon, a researcher at Mirae Asset Securities, said, "Even though the government has continuously announced KOSDAQ activation policies, the unprecedented level of neglect since the market's inception cannot be explained by 'earnings polarization' alone," adding, "A deeper issue lies in the 'many births, few deaths' structure and the weakened market confidence due to vulnerable supply-demand conditions."

Researcher Yoon emphasized, "To change the KOSDAQ market, we need to shift from the existing 'many births, few deaths' structure to a 'many births, many deaths' one," adding, "It is crucial to increase the delisting of insolvent companies to improve the market's fundamentals."

Accelerate the Removal of Insolvent Companies and Introduce the Promotion-Relegation System

The KOSDAQ promotion-relegation system, scheduled for full introduction from next year, is expected to contribute to improving the market's overall quality. The government and the Korea Exchange are preparing to implement a promotion-relegation system that segments the KOSDAQ into categories such as blue-chip companies, general companies, and companies under management, thereby encouraging competition. The government plans to attract more blue-chip companies and institutional funds to the KOSDAQ through this system.

According to the Korea Institute of Finance, Japan, which introduced a similar promotion-relegation system in 2022—four years ahead of Korea—also achieved qualitative improvements in its capital markets. Bomi Lee, Senior Research Fellow at the Korea Institute of Finance, observed, "In 2022, the Tokyo Stock Exchange (TSE) reorganized its markets into three segments: Prime, Standard, and Growth," adding, "After the reorganization, the Prime market led a qualitative improvement in the overall stock market."

However, there are concerns that, following the introduction of the promotion-relegation system, early-stage companies such as those in biotechnology and ventures may become marginalized within the market. Senior Research Fellow Lee stated, "Segment classification and promotion-relegation criteria should be designed to prioritize qualitative elements—such as payment capacity, sustainability as a going concern, and the integrity of internal controls—over criteria like company size, which are difficult for firms to control," adding, "At the same time, it is necessary to introduce measures for a soft landing that can mitigate the stigmatizing effects of transitions between market segments."

This content was produced with the assistance of AI translation services.