Nine Short-Covering Stock Picks as South Korea Deleverages After $764 Million in Single-Stock ETF Redemptions

16 single-stock leveraged ETFs logged combined redemptions of 1.0606 trillion won ($764 million) in August

Margin-loan balances have also fallen 25.46% from their June peak

Nine stocks may attract short-covering flows as short sellers lock in profits

As expectations build for a rebound after the recent market correction, brokerages are advising investors to focus on stocks that could benefit from short covering, or buying by short sellers to close out positions. LG Electronics, Hanwha Ocean and Mirae Asset Securities are among nine stocks that could outperform during a sideways period before a broader rebound takes hold. Their shares have fallen sharply under heavy short-selling pressure even as brokerage earnings forecasts remain upbeat.

The Kospi closed down 37.61 points, or 0.60%, at 6,258.77 on Aug. 7, according to the Korea Exchange. The benchmark has rebounded 11.89% after tumbling 38.63% from its June 20 peak of 9,114.55 to its July 30 low of 5,593.56.

The rebound is not limited to the index. Leverage positions, one of the main drivers of volatility in the local market, have also been reduced substantially. Leveraged investing seeks outsized returns by amplifying market swings, typically through borrowed funds or leveraged exchange-traded funds. In South Korea, investor flows had become heavily concentrated in single-stock leveraged ETFs, helping fuel a sharp rise in volatility over the past month.

In the four trading days through Aug. 6, 16 single-stock leveraged ETFs listed in South Korea posted combined net redemptions of 1.0606 trillion won ($764 million). Funds flowed out after trading barriers were raised on July 31, including a requirement that investors hold 30 million won ($21,600) in cash deposits to trade single-stock leveraged ETFs.

Margin-loan balances have also shrunk. Outstanding balances stood at 27.9437 trillion won ($20.1 billion) as of Aug. 6, down 25.46% from 37.4859 trillion won ($27.0 billion) on June 24. Since July 31, when the Kospi staged a sharp rebound, margin balances have remained below 30 trillion won.

Lee Kyung-soo, an analyst at Hana Securities, said rapid deleveraging in the South Korean stock market has laid the groundwork for lower volatility ahead. A sustained rebound in Korean equities will likely gain traction only after foreign investors begin buying as part of portfolio rebalancing. Until then, alpha bets centered on individual stocks rather than the broader index could become the market's main strategy, a pattern he said also fits August's seasonal tendencies.

Stocks that have historically posted strong alpha in August share several characteristics: heavy short interest, steep share-price declines, strong retail net buying and upward revisions to earnings estimates. Those are also the hallmarks of stocks with strong rebound potential after a selloff, as short sellers in beaten-down blue chips buy shares back to lock in profits.

Using FnGuide's DataGuide service, Hankyung.com screened for nine stocks that met four conditions: a short-balance ratio of at least 0.5%; retail net buying over the past month, or 20 trading days, equal to at least 0.5% of market capitalization; an increase of at least 10% in consensus forecasts for full-year net profit between May 29 and Aug. 6; and a share-price decline of at least 10% over the same period.

Among the selected names, LG Electronics had the largest market capitalization at 28.5374 trillion won ($20.5 billion) as of the close on Aug. 6. Its borrowed short-selling balance ratio stood at 0.77% as of Aug. 4, and the stock had fallen 40.2% from late May, before concentration driven by the launch of single-stock leveraged ETFs began in earnest. Even so, consensus forecasts for its full-year net profit this year have been raised 25.08% over the same period.

Lee Jong-wook, an analyst at Samsung Securities, said LG Electronics' share price has now given back most of the premium tied to robot-related new businesses that drove its rally in early June. Given the company's push into new businesses, its shares could regain a premium linked to AI data-center cooling solutions and humanoid robots, he added.

Hanwha Ocean, the second-largest company on the list with a market capitalization of 27.7917 trillion won ($20.0 billion), saw its stock plunge after failing to win Canada's new submarine procurement project, known as CPSP. Its short-balance ratio has also climbed to 1.07%. Still, consensus forecasts for this year's net profit have been raised 27.88% over the past two months, supported by continued strong earnings.

Eom Kyung-ah, an analyst at Shinyoung Securities, said the share-price correction tied to the failed CPSP bid was excessive. With geopolitical risks persisting, Hanwha Group's order strategy focused on energy and national security should begin to show results in the second half, she said.

Han Kyung-woo, Hankyung.com reporter (case@hankyung.com)