The Kospi index is displayed at the dealing room of Hana Bank's headquarters in Jung-gu, Seoul, on Thursday. The Kospi opened down 103.71 points, or 1.82 percent, at 5,580.09. [Yonhap]
The Kospi index is displayed at the dealing room of Hana Bank's headquarters in Jung-gu, Seoul, on Thursday. The Kospi opened down 103.71 points, or 1.82 percent, at 5,580.09. [Yonhap]

Korea Exchange's overhaul of its industrial classification system, known as KRICS, is shaping up as a major variable in the December regular review of the KOSPI 200 and Kosdaq 150, with the contours of likely additions and deletions coming into view. As sector reassignments alter the peer groups and relative market-capitalization rankings used in index-inclusion screening, certain stocks are drawing attention as potential beneficiaries of anticipated fund inflows.

KRICS is a framework introduced by Korea Exchange to better reflect domestic industry characteristics and align with global classification standards. It is organized into nine sectors, 24 industry groups, 60 industries and 129 sub-industries. Because each company is assigned to a single sub-industry based on its business profile, some stocks will now sit in a different industry group than before — a shift that can affect which peer group a company is benchmarked against and where it ranks within that group during index-inclusion reviews.

Shinhan Securities estimated Thursday that roughly 71 billion won ($53 million) in ETF funds would flow into Daeduck Electronics, a KOSPI 200 inclusion candidate, while Fadu and Taihan Fiberoptics — both Kosdaq 150 candidates — would each attract about 72.7 billion won and 69.6 billion won, respectively. The brokerage said ETF money alone, excluding pension funds and index funds, could generate buying demand of around 70 billion won across the three stocks. ETFs that replicate or align their portfolios with an index must buy newly added stocks and sell deleted ones whenever a regular review takes effect, meaning supply-and-demand dynamics can shift independently of any change in a company's fundamentals.

Within the KOSPI 200, the reclassification of large-cap stocks is expected to reshape the competitive landscape for inclusion in the IT sector. When major large-caps move to different industry groups, the peer set changes — and that can alter the relative standing of companies that remain in their original group.

"Even if a company's business content and market capitalization stay the same, a change in industry group can shift the peer set used in benchmark-index inclusion reviews, potentially improving a company's relative position," said Kim Ki-baek, a researcher at Shinhan Securities. The reverse is also true: a stock that ranked highly within its original group may find its inclusion competitiveness diminished once placed against a new set of peers. Vacancies created by large-cap departures can open the door for other companies to enter an index, while the arrival of large-caps can squeeze out incumbents.

In the Kosdaq 150, the projected inflows for Fadu and Taihan Fiberoptics stand out. The total assets of Kosdaq 150-tracking ETFs are estimated at about 5.9 trillion won — smaller than those tracking the KOSPI 200 — yet the expected inflows for the two stocks are comparable to those projected for KOSPI 200 candidate Daeduck Electronics. "Although the ETF assets tracking the Kosdaq 150 are below 6 trillion won, the two stocks carry a large weight within the index, so around 70 billion won is expected to flow into Fadu and Taihan Fiberoptics," Kim said. "Even when total ETF assets are not especially large, a stock's weight within the index can generate substantial buying demand."

Beyond the absolute size of projected inflows, the ratio of expected ETF inflows to average daily trading volume is another variable worth watching. For stocks with thin average turnover, even a relatively modest inflow can have an outsized impact on supply and demand. Shinhan Securities estimated that the ratio of projected ETF inflows to the 20-trading-day average daily volume would exceed 500 percent for KOSPI 200 candidates including Hankook Shell Oil, Seoul Guarantee Insurance and Hyosung, and top 300 percent for Kosdaq 150 candidates including ENF Technology, Samt, JS Link and GST.

Korea Exchange announced its plan to introduce KRICS in September and published the resulting sector classifications for individual stocks on Oct. 26. The list of stocks subject to the KOSPI 200 and Kosdaq 150 regular review is scheduled to be released in November, with the revised indexes set to take effect on Dec. 11 — the trading day after the December futures and options expiration date of Dec. 10.


kacew@heraldcorp.com