Hedge Funds: Dalton Cautions on Korea’s $100 Billion Bio Stocks 

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For those investors lucky enough to have invested in South Korea’s health care sector, now may be the time to assess the risks, says Dalton Investments, a $3 billion California-based hedge fund. 

Retail investors who have invested in South Korea’s health care sector risk over-valuing the market.  The Covid-19 pandemic is one of the primary drivers of the current strength of the health care sector worldwide.  Countries that exceeded expectations in preventing the spread of the virus may face a rapid escalation of asset prices.  This may lead to a sudden contraction of the sector.

Investors seek growth in an overvalued market

South Korea is among some of the countries that have been successful at preventing the virus from spreading beyond reasonable control.  The demand in South Korea’s health care sector has led stocks in biotech and pharmaceuticals to suddenly skyrocket.  Shin Poong Pharmaceutical Co. and Humasis Co. rose by 300 percent and by well over 600 percent, respectively.  Twenty-five billion dollars worth of shares in Kospi were bought by retail investors.  According to a senior analyst at Dalton, James Lim, the stability of the market is becoming more fragile as retail investors flood in.  Other external factors, such as the ban on short-selling in South Korea, also play a role in the market’s potential turbulence.  If the ban is lifted, this can attract even more investors, which maximizes the risk of a potential market fallout.  

Assessing the risks

Essentially, the risk of investors abruptly pulling out of the market due to an especially fragile sector is growing.  Because testing drugs and medical technology can be an extremely delicate process, there is no way to be too confident in buying health-care stocks.  Some key indicators like the MSCI Korea Health Care Index have risen by 59 percent, while Kospi has fallen 4.7 percent this year — and history shows that a split market like this could lead to bad outcomes.  

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