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Investors cash out amid record-high KOSPI

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Dealers sit at their desks in a trading room at a branch of Hana Bank in Seoul, Aug. 4. Korea Times file
Dealers sit at their desks in a trading room at a branch of Hana Bank in Seoul, Aug. 4. Korea Times file

By Lee Kyung-min

An increasing number of stock-related bond holders have converted equity-like hybrid securities into common stocks in July, a move seeking to cash out on a steep gain brought on by a short-term bullish performance of the local bourse, data showed Sunday.

Experts warn that the collective action bodes ill for retail stock investors, many of whose recent investment in the much-volatile equity market amid record-low borrowing costs could rapidly become shaky once the "highly overextended and overestimated" market plunges.

Data from Korea Securities Depository (KSD) showed the number of conversion into stocks from convertible bonds (CB), bonds with warrants (WB) and exchangeable bonds (EB) was 358 in July, up 23 percent from 291 in June.

Holders of each of the three bond types have the right to buy or convert the securities into a certain number of shares of common stock in the company that issues the bonds, a reason why the local bourse index and the number of conversion move in sync.

The increase was the highest in EBs, whose figure jumped over five-fold to 25 from four a month earlier. This was followed by an 18 percent month-on-month increase in BW conversions, and a 15 percent month-on-month for CBs.

The July figures are comparable to those in March when the number of conversions came to a meager 64, down from 160 in February and 167 in January.

The benchmark Korea Composite Stock Price Index (KOSPI) closed at 2,351.67, Friday, up 9.06 points, or 0.39 percent, from the previous session, hitting a two year-high.

For context, the index plummeted to a low of 1,457.64 in March amid fears triggered by the COVID-19 pandemic. The conversion total bottomed out in March and has since been on a steady rise. It was 224 in May and 291 in June.

Many investors opting for a "cash-out-now" over a "wait-and-see" approach is an indication that the much-extended equity market has little room to advance further, analysts said.

"Converting at a later date guarantees a higher return, but only if the stock market rages on," one analyst said. "The high demand for cash instead of waiting signals that they view the market has little momentum to back the uptrend."

Further advancing the assessment is the forward price-earnings ratio (PER) hitting a 13-year high in August. The PER is the ratio of a company's share price to its earnings per share. The ratio is used for valuing companies and to determine whether they are overvalued or undervalued.

Data from FN Guide, a financial data service provider, showed the forward PER stood at 12.84 Aug. 6, the highest since July 2007 when it hit 12.95.

When measured by performance of the last four quarters, the ratio is still high standing at 27.12 as of Aug. 6, the highest since June 2002, when the figure was 27.3.

Opinions are mixed on whether the current ratio "correctly" reflects the stock valuation. Some say the stock market will continue to remain bullish for the time being driven by stimulus packages to fight COVID-19, record-low interest rates and expectations on the development of vaccines against and treatment for the virus. Others view the ratio will lead investors on, given the market is full of "bubbles" that will certainly burst if the earnings of virus-hit companies do not see material improvement.

"The ratio is subject to change with key factors being the market perception on prospects for growth and expected risks. Whether the number is a correct reflection of reality will be determined largely by the corporate performance of major listed firms in the quarters to come," he added.


Lee Kyung-min lkm@koreatimes.co.kr


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