Reporter's Notebook Morgan Stanley's remarks on short-selling raises doubts

A man enters the Morgan Stanley building in New York in this 2007 file photo. AP-Yonhap

By Park Jae-hyuk

Morgan Stanley's recent remarks on the lifting of the short-selling ban here is raising doubts about a possible “hidden intention,” as its analysis, that could threaten those investing in the healthcare and software sectors, may bring some benefits to the U.S. investment bank itself.

In its report on the Korean market titled, “Climbing the Wall of Expectations,” Morgan Stanley wrote in bold letters that healthcare and software, which were among the sub-sectors to “avoid,” have been hit hard by the lifting of the ban on the investment method that bets on the falling price of a stock.

Although the financial firm added that the measure has not impacted the market at the “index level” and that the proportion of short-selling trading volume in the first two weeks after the lifting of the ban was lower than the historical average, the overall tone of the report was quite skeptical.

Projecting short-selling trading volume to rise gradually, Morgan Stanley noted foreign inflows look uncertain despite the lifting of the ban.

“Foreign investor inflows should be the difference-maker, but for the second half in 2021, we believe that macro and emerging market fund flow conditions may not be so conducive for foreign inflows to pick up,” it said. “We believe it is highly unlikely for the National Pension Service to increase its allocation weighting on domestic equities when they formulate their five-year strategic asset allocation plan in May and in June.”

The U.S. firm's outlook can be interpreted by retail investors here as an attempt to encourage more short-selling on the Seoul bourse, although foreign investment banks have denied any hidden intention behind their reports and emphasized that its research and sales arms are separate.

Considering the fact that Morgan Stanley has been one of the largest beneficiaries of the nation's short-selling system, however, it is difficult to just ignore such speculation.

According to data from the Financial Supervisory Service given to Rep. Park Yong-jin of the ruling Democratic Party of Korea, Morgan Stanley's Seoul office ranked third in terms of short-selling commissions between 2014 and 2020.

It earned 56.8 billion won ($50 million), following Credit Suisse (86.7 billion won) and Merrill Lynch (59 billion won).

After the lifting of the short-selling ban, Morgan Stanley disclosed its “large short-selling balance” in 10 new companies on the Korean stock market between May 3 and 15, making the disclosure most frequently among foreign brokerages during the first two weeks after the lifting of the ban. The Korea Exchange requires financial institutions to make such disclosures, if they hold at least a 0.5 percent short-selling balance of a listed firm's total outstanding shares.