KOSPI's volatility reflects industrial shifts, not isolated events

The South Korean stock market, KOSPI, is exhibiting significant daily fluctuations, a phenomenon that analysts attribute not to temporary market anomalies but to a fundamental shift in the nation's industrial structure. This transformation has led to a dramatic increase in the weighting of high-volatility sectors within the KOSPI's overall market capitalization.

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The structural change in the stock market, where the proportion of high-volatility sectors is gradually increasing, lies at the root of the rise in volatility in the Korean stock market.

Data shows that sectors such as information technology (IT), energy, healthcare, and industrials, collectively termed 'high-volatility sectors,' have seen their share of the KOSPI's market cap balloon from 35% in 2000 to a staggering 84% by the end of June 2024. This structural change means that the index is now more sensitive to the performance of these inherently more volatile industries, leading to amplified market swings.

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As the proportion of high-volatility sectors, which are sensitive to domestic and international economic fluctuations and investment cycles, increases, the volatility of the stock price index is likely to rise.

Contributing significantly to this trend is the rapid growth and market dominance of major tech companies, particularly Samsung Electronics and SK Hynix. Their individual stock volatilities have also increased substantially, and their synchronized movements now account for a considerable portion of the KOSPI's overall volatility. This concentration of risk in a few large-cap stocks weakens the diversification benefits typically offered by a broad market index.

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The synchronization between the stock prices of these two companies is very high, and the daily return volatility of the two stocks has increased.

Furthermore, the market's volatility is exacerbated by a persistent divergence in trading behavior between institutional investors (including foreign entities) and domestic retail investors. While institutions have been net sellers, retail investors have been significant net buyers, creating a supply-demand imbalance that fuels price fluctuations. This clash in investment strategies and market outlooks between different investor groups is a key factor driving the KOSPI's rollercoaster performance.

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It can be assessed that about one-third of the increase in KOSPI 200 volatility in the first half of this year was due to the increase in volatility of Samsung Electronics and SK Hynix.