Although the possibility of an end to the war between the United States and Iran is being raised, foreigners are continuing a trend of large net selling in the domestic stock market. In particular, the won is showing a record weak trend (a rise in the won-dollar exchange rate), making it unlikely that the foreign funds exiting en masse will change direction.
◇ In March, foreigners net-bought 23 trillion won… risk of "foreign-exchange loss" amid a high exchange rate in the 1,500-won range
According to the Korea Exchange (KRX) on the 26th, foreigners net-sold 26.2394 trillion won in the main board from the 2nd to the 26th of this month. Although three trading days remain in March, this has already surpassed last month's record-high monthly net selling of 21.0731 trillion won. The combined net selling by foreigners last month and this month is approaching 47 trillion won. In contrast, individual investors net-bought 26.7220 trillion won.
Even on days when the index rebounded, foreigners were net sellers of domestic stocks. Although the KOSPI rebounded 1.59% the previous day, foreigners net-sold 1.2866 trillion won. Since the Iran war broke out, the days when foreigners net-bought on the main board were only three trading sessions—on the 4th, 10th and 18th.
Accordingly, as of the 25th, the market capitalization share of stocks held by foreigners on the main board was 37.14%, down slightly from 38.10% on the 26th of last month.
The recent break of 1,500 won in the won-dollar exchange rate and the prolonged weak-won trend are also obstacles to foreigners returning to the stock market. For foreign investors, even if share prices rise, a continued weak won leads to foreign-exchange losses (losses from exchange rate fluctuations), reducing returns.
Hur Jun-young, a professor of economics at Sogang University, said, "For foreigners to make a profit by investing in domestic stocks, the exchange rate at the time of selling is crucial, and an exchange rate in the 1,500-won range seems to be deemed risky for foreign investors to enter the domestic market," adding, "Unless the exchange rate stabilizes, foreign selling is likely to continue for the time being."
Cho Joon-gi, an analyst at SK Securities, said, "For trend-following funds with strong momentum-chasing characteristics to move, the trend must be maintained after either oil prices or the exchange rate change direction."
◇ Risk management needed in a volatile market
Some say the recent foreign selling is a structural trend rather than an issue with the domestic market's fundamentals.
Lee Sang-yeon, an analyst at Shinyoung Securities, said, "Since the start of the year, gains have expanded mainly in large caps with high foreign ownership, and the resulting unwinding of existing positions by foreigners accounts for a significant part of the overall net selling trend," adding, "Rather than over-interpreting the short-term net selling by foreigners, it is more important to observe which sectors foreign funds are being reallocated to."
Although foreign funds continue to exit, foreigners are net buyers in some sectors such as cosmetics and insurance. Through the 25th of this month, the stock foreigners bought the most in the domestic market was Samsung Life Insurance (213.7 billion won). They also net-bought APR 187.4 billion won, COSMAX 34.9 billion won and d'Alba Global 20.1 billion won.
Experts advised that individual investors should respond to volatility as foreign funds move en masse.
Lee Hyo-seop, a senior fellow at the Korea Capital Market Institute, said, "From an earnings perspective, the market seems undervalued, spurring a heated buying mood among individuals, but if earnings weaken due to an economic slowdown, share price declines could accelerate," adding, "It is desirable to avoid excessive investing with borrowed money or leverage and to respond with diversification rather than placing excessive weights on a single stock or sector."
Lee Sang-yeon said, "From a risk management perspective, it will be effective to hold a certain level of cash within the portfolio and take a selective approach focused on large caps whose declines have been excessive relative to fundamentals, rather than aggressively increasing weights across the market."