Though the possibility of an end to the war between the United States and Iran has been raised, foreigners are continuing large-scale net selling on the domestic stock market. In particular, the won is showing a record weak trend (a rise in the won-dollar exchange rate), making it difficult to expect the large outflows of foreign funds to reverse course.
◇ In March, foreigners net bought 26 trillion won… risk of "foreign exchange loss" amid high exchange rate in the 1,500-won range
According to the Korea Exchange (KRX) on the 26th, foreigners made net sales of 26.2394 trillion won in the main board market from the 2nd to the 26th of this month. Although three trading days remain in March, the amount has already surpassed last month's record monthly net selling high of 21.0731 trillion won. The combined net foreign selling for last month and this month is approaching 47 trillion won. By contrast, individual investors made net purchases of 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 were net sellers of 1.2866 trillion won. Since the Iran war broke out, the only days when foreigners were net buyers on the main board were the 4th, 10th and 18th—just three sessions.
As of the 25th, the market capitalization share of stocks held by foreigners on the main board stood at 37.14%, a slight decrease from 38.10% on the 26th of last month.
The recent climb of the won-dollar exchange rate above 1,500 won and the prolongation of the weak-won trend are also obstacles to the return of foreigners to the stock market. For foreign investors, even if stock prices rise, continued won weakness leads to foreign exchange losses (losses from exchange rate fluctuations), reducing returns.
Heo 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 considered 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 Jun-gi, a researcher at SK Securities, said, "For trend-following funds with strong momentum characteristics to move, the trend needs to hold after either oil prices or the exchange rate reverse direction."
◇ Risk management needed in a volatile market
Some analysts say the recent foreign selling is a structural flow rather than an issue with the domestic market's fundamentals.
Lee Sang-yeon, a researcher at Shinyoung Securities, said, "Since the start of the year, gains have widened among large caps with high foreign ownership, and the unwinding of existing foreign holdings accounts for a significant portion of the overall net selling trend," adding, "Rather than overemphasizing the short-term net selling by foreigners, it is more important to observe which industries foreign funds are being reallocated to."
Although foreign funds continue to flow out, foreigners are net buyers in some sectors such as cosmetics and insurance. Through the 25th of this month, the stock most bought by foreigners on the domestic market was Samsung Life Insurance (213.7 billion won). Others that saw net foreign buying included APR at 187.4 billion won, COSMAX at 34.9 billion won, and d'Alba Global at 20.1 billion won.
Experts advised that individual investors should respond to volatility as foreign funds move en masse.
Lee Hyo-seop, a senior research fellow at the Korea Capital Market Institute, said, "On an earnings basis, the market appears undervalued, and that perception is overheating individual buying, but if earnings weaken due to an economic slowdown, stock declines could accelerate," adding, "It is desirable to avoid excessive investing with borrowed money or leverage and to respond with diversification rather than concentrating excessively on a single stock or sector."
Researcher Lee Sang-yeon said, "From a risk management perspective, it is effective to hold a certain level of cash in the portfolio and to take a selective approach focused on large caps that have fallen excessively relative to fundamentals, rather than aggressively increasing exposure to the overall market."