(Bloomberg) -- For those investors lucky enough to have invested in South Korea's health care sector, now may be the time to reassess the risks.
James Lim, a senior analyst at the $3 billion California-based hedge fund Dalton Investments LLC., is warning that retail investors could pull out of the nation's equity market on unforeseen events such as an earlier-than-expected curb in the Covid-19 pandemic or a lifting of a short-sell ban. Drug-related shares are especially vulnerable because hopes for a virus cure have made them expensive, according to Lim.
“I feel uneasy over the Korean stock market these days,” Lim said in an interview. “The entire health care sector is so expensive, I hardly see these kind of valuations in any other markets in the world.”
Samsung Biologics Co., South Korea's third-biggest stock with a $43 billion market cap, has surged 81% this year, trading at 265 times earnings. Its peer Celltrion Inc. is up 72% at 134 times profits. The combined market cap of the nation's three biggest health care stocks -- Samsung Biologics, Celltrion Inc. and Celltrion Healthcare Co. --- is about $100 billion.
Demand for drug-related stocks has been so strong that even less known names have soared. Shin Poong Pharmaceutical Co. jumped about 300% this year to become the second-best performer in the Kospi after media reports that its Phase II clinical study for a coronavirus drug has started. Humasis Co., a medical devices manufacturing company, jumped 677% this year amid expectations for its development of a test kit with Celltrion Inc.
Much of this demand has been driven by retail investors, who bought a net 30 trillion won ($25 billion) of Kospi shares this year. Deposits for stock trading at local brokerages and margin trading by individual traders have both spiked near a record, amid tighter rules on the Korean housing market and record-low interest rates. Additionally, regulators are discussing whether to extend the ban on short-selling that is scheduled to end in September.
Read more: Analyst's Bubble Warning Sparks a Flood of Angry Calls in Korea
According to Lim, the recent retail frenzy for Korea's health care stocks is not only increasing volatility but also making the market “polarized” in terms of valuations. The MSCI Korea Health Care Index has surged 59% so far this year, compared with a 4.7% decline in the benchmark Kospi.
Lim points to the past when warning investors about the health care sector's vulnerability. South Korean biotech stocks plunged in 2019 on woes including alleged stock manipulation, failed clinical trials, suspicions of accounting irregularities and a canceled license.
History shows if something happens to make this bubble burst, “retail investors can be extremely disappointed, suddenly pulling their money out of the market,” said Lim.
©2020 Bloomberg L.P.
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