Korea’s Meme Stock Craze Leads to Small Caps Outperforming the Index

In South Korea, young retail investors are turning away from traditional blue-chip stocks like Samsung Electronics and Hyundai Motor. Instead, they are flocking to meme stocks in the hot science and technology sectors, reminiscent of the meme stock craze witnessed in the US.

South Korean Investors Turn to Meme Stocks

Despite warnings from officials about the risks of rumor-driven trading, retail traders in South Korea are jumping on the meme stock bandwagon. Meme stocks, particularly in the electric vehicle (EV) battery sector, have become popular among retail traders in the country.

This surge in interest can be attributed to US regulations promoting local investment in the EV battery industry while excluding Chinese battery companies from the American market. Under the Inflation Reduction Act, the regulations aim to encourage onshore investment in the sector.

The meme stock mania has even given rise to a prominent online tipster known as “Mr. Batt-Man” or “Mr. Battery.” The user has gained a massive retail following, further fueling the buying frenzy in the sector.

It is worth noting that Asian investors are also betting big on companies involved in artificial intelligence (AI). More specifically, investors in Taiwan have been heavily investing in basic box assembly companies like Quanta, Wistron, and Inventec. 

These companies have experienced significant stock price increases, with some doubling or even quadrupling in value this year. However, assembling AI servers is not fundamentally different from assembling traditional servers, and the overall demand for servers may decrease with the rise of more powerful AI servers. 

Popular Korean Stocks Among Retail Investors

Several Korean stocks, such as Ecopro, Posco Future M, Ecopro BM, and even Posco (despite being primarily a steel company), have witnessed impressive price surges. These thematic stocks have doubled in value since the end of March and experienced a 60-70% rise in July alone. 

So far this year, South Korea’s benchmark KOSPI index is up 13.9%, but those gains have been far outpaced by the 33.7% rise in the smaller Kosdaq market. The meme stock craze has even helped the Kosdaq index become one of the world’s best performers among those tracked by Bloomberg.

However, margin loans for the Kosdaq have also surged by 27% this year and are nearing historic highs. Analysts from Goldman Sachs have warned about the high risks associated with margin calls and the potential consequences for retail investors.

Lee Choong-hun, head of research specialist Value Finder, said that the lack of information on small stocks fuels volatility. “Small listed companies do not host investor relations events, refusing to offer information. That is creating a vicious cycle that keeps retail investors from accessing it,” Lee said.

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Regulators Voice Concern Regarding the Rise of Meme Stocks

The surge in meme stocks and speculative trading has prompted regulators to prioritize meme-stock risk management. The Financial Services Commission and the Korea Exchange have expressed concerns about the disruptions caused by these stocks and the increasing use of margin loans. 

“We will control excessive betting on meme stocks, reviving investors’ trust in stocks based on corporate performance and their value in the future,” Kim So-young, vice chairman of the FSC, said at a news conference last month.

“We will offer correct information to investors on meme stocks, while monitoring whether margin loans from brokerage houses are appropriate. We will also crack down on any market-manipulating actions seriously.”

While meme stock investing has propelled the Kosdaq index to impressive heights, concerns about excessive churn and the risks associated with margin loans persist. The ever-changing nature of thematic stocks and the limited supply of money flowing into these speculative investments further increase the risks associated with these stocks. 

Nevertheless, the Kosdaq decreased 14.51 points, or 1.59 percent, to close at 898.04 points on Tuesday. The index is up more than 32% year-to-date (YTD). 

Do you think meme stocks are a net positive or negative for the market? Let us know in the comments below.