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Short sellers are winning in Kakao stock against retail investors in Korea

Short-sellers have wreaked havoc on South Korean retail investors’ favorite equities this month, riding on a push by local authorities to limit the influence of Kakao Corp. and other internet behemoths.

Korea stock exchange

Image: Solace

Kakao, the operator of Korea’s most popular messaging app, was the most-shorted stock in September, as politicians expressed worries about its market domination, drawing similarities to China’s crackdowns. It has dropped more than 20%, shedding $14 billion in market value due to institutional selling, while being the most bought stock by day traders.

KakaoBank Corp., a newly listed internet-only lender, NCSoft Corp., and Kakao Corp.’s rival Naver Corp. are among the other companies that are among the most shorted and most acquired by individual investors.

“Retail investors have a proclivity to be contrarian,” said Kim DongJoo, CEO of Iruda Discretionary Investment Co., a Seoul-based business that caters mostly to retail investors. Following the selloffs triggered by short-sellers, mom and pop traders now perceive the pricing of their preferred companies as more appealing, he added.

Despite Asia’s largest outflow of foreign investors, Korea’s fiercely committed retail traders helped fuel one of the world’s greatest market recoveries from last year’s epidemic lows. Individuals’ power has waned after a 13-month prohibition on short-selling was lifted, and the benchmark Kospi has moved mainly sideways for the previous four months.

This month, the value of daily short sales reached new highs, surpassing those seen in May, when the prohibition on negative wagers intended to reduce epidemic volatility was lifted.

Despite its recent drop, Kakao’s stock is still four times what it was 18 months ago, thanks to a rise in demand fueled by the pandemic stay-at-home trend and successful corporate spin-off listings. Individual investors control 62.5 percent of the company, dubbed “the people’s stock.”

The business, which was founded by billionaire Brian Kim, said earlier this week that it will forsake the high-growth strategy that has been criticized as a “symbol of greed.” Despite these efforts, the stock has continued to fall, and many market observers believe that legislators from the ruling party would target the internet giant and other large digital businesses during a parliamentary hearing scheduled to begin next month.

This might increase stock volatility, putting individual investors in a poor situation. “Some people are catching a falling knife,” said Han Jiyoung, an analyst at Kiwoom Securities Co. “However, any substantial rebound in the equities appears improbable, and foreigners trying to benefit from short-selling has increased.” He said that hopes for a GameStop Corp.-style surge may be dashed since “South Korean retail investors are not as unified as they used to be.”

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