As the KOSPI index, which has been on a record rally, draws close to the symbolic "5,000 points," the pinnacle that signifies the normal level Korea's stock market can reach, investors are at a crossroads. They must decide whether to start descending now or, hoping for a higher summit, exercise patience and refrain from pressing the sell button.
For investors who have decided not to step out of the market yet, the dilemma can only deepen. Many factors must be considered, but a look at the recent flow of foreign funds can serve as good reference materials for investment decisions.
One notable feature of the rally that has continued since last year is the odd phenomenon of the KOSPI index remaining strong even as the won exchange rate surged (the won weakened). Typically, when the exchange rate rises, stock prices fall, so the existing "stock price–exchange rate formula" has been broken.
Heo Jae-hwan, a researcher at Eugene Investment & Securities, analyzed that this change occurred because domestic corporations' earnings have begun to be influenced more by the growth of the artificial intelligence (AI) industry and supply chains than by the exchange rate.
In the past, the earnings of domestic listed companies were driven by capital goods exports and were therefore heavily swayed by the global economy, but over the past two years, changes in AI and supply chains have made them less sensitive to economic conditions such as the exchange rate. According to the report, before 2023, when the won strengthened, expectations for corporations' earnings rose after a lag of about six to nine months, but that is not necessarily the case now.
Heo said, "Even if the global economy is not very strong, demand has emerged for semiconductors, power equipment, and shipbuilding." These sectors have led the rally in our stock market.
What deserves more attention is the analysis that foreign investors have recently been net buyers of industrials—traditionally cyclical sectors—such as shipbuilding, utilities, steel, construction, and securities, more than the sharply rising semiconductor and auto stocks. With foreigners' allocation to semiconductors already high, analysis suggests they are diversifying, focusing on sectors that are sensitive to the economy but where their relative holdings are lower.
Heo advised, "Foreign investors are presumed to be betting on a rebound in earnings and the possibility of expanded dividends," adding, "Attention should also be paid to the increased foreign holdings in trading companies and capital goods that include holding companies and defense contractors."