Analysts say foreigners, who had sold heavily, may have room to turn net buyers after Korea's stock market saw a sharp correction from the war between the United States and Israel and Iran. Expectations for earnings improvement remain strong for semiconductor companies such as Samsung Electronics and SK hynix, and the valuation of Korean stocks fell after the index plunged on the 3rd and 4th.
There are variables to watch. Foreign funds are heavily influenced by how the won's value (exchange rate) and U.S. Government Bonds yields move.
The KOSPI index plunged after instability in the Middle East. On the last transaction day in Feb., the KOSPI index topped 6,200 points, but after the war broke out it sank to near the 5,500 level.
As the index slumped, valuation metrics also fell. According to the Korea Exchange (KRX) on the 6th, the KOSPI price-earnings ratio (PER) dropped 18% from 26.04 on Feb. 27, the last transaction day before the war, to 21.23 on Mar. 4. On the 5th, as the KOSPI index surged, the KOSPI PER rose to 23.28, but it still has not recovered to the prewar level.
Some analysts said the correction eased concerns that Korean stocks were overvalued. A capital market expert said, "Foreign investors hold stocks for a long time and put a lot of weight on valuation," and added, "It can be understood that foreigners showed net selling around the 5,200–5,300 level on the KOSPI because they viewed the sharply higher valuation of Korean stocks as excessively high." The expert said, "As the KOSPI index climbed to 6,200, the overvaluation debate intensified, but the outbreak of war has partially eased that debate."
In particular, foreigners concentrated their net buying on large-cap semiconductor stocks such as Samsung Electronics and SK hynix, and with those shares soaring, they needed to rebalance their portfolios.
Lee Nam-woo, chair of the Korea Corporate Governance Forum, said, "Over the past six months, shares of Samsung Electronics and SK hynix have risen two to three times, increasing their weights," and explained, "There were moves by foreign hedge funds to take profits while also adjusting portfolio weights."
The indicators to watch when predicting whether foreign funds will flow into Korea's stock market are the exchange rate and U.S. interest rates.
From the perspective of foreigners who convert dollars into won to invest in Korean stocks and then must convert back into dollars when they make a profit, sharp swings in the exchange rate can have a major impact on returns.
It is also necessary to watch the trend in U.S. Government Bonds yields. If U.S. Government Bonds yields wobble, foreigners may cut their allocation to Korean stocks to shed risky assets. Noh Dong-gil, an analyst at Shinhan Investment & Securities, explained, "If the foreign exchange market and the U.S. bond market are unstable, foreigners can reduce positions regardless of price."