While the KOSPI index has continued to hit a record high, foreign investors are selling nearly 100 trillion won worth of stocks in the domestic market. In the securities industry, the prevailing view is that this reflects profit-taking after a short-term surge and global funds' asset allocation adjustments (portfolio rebalancing).
However, given the sheer size and rapid pace of the selling, many are voicing concerns about a "structural capital outflow" that goes beyond a simple correction. On the other hand, despite heavy foreign selling, the overall foreign equity share has risen due to the stock price surge, creating an odd phenomenon that has sharply divided market interpretation.
According to the Korea Exchange (KRX) on the 19th, foreigners made net sales of 98.2 trillion won (including NEXTRADE (NXT)) in the Korea Exchange market alone through the 15th of this month. That is 11 times last year's full-year net sales of 9.0474 trillion won and already more than double the record net sales during the 2008 global financial crisis of 43.4978 trillion won. Observers called it unusual given that even the first half has not yet ended.
Bloomberg reported that as the pace of foreigners' net selling of Korean stocks accelerates, this month's net sales could grow to the third-largest on record on a monthly basis. Foreign investors also posted record selling in February and March, with net sales of 19 trillion won and 35 trillion won, respectively. So far this month, foreigners have extended their net selling for eight consecutive trading days through today, offloading about 25 trillion won.
The selling is concentrated in semiconductor stocks. Since the start of the month, foreigners have made net sales of 12.3476 trillion won in SK hynix and 9.3638 trillion won in Samsung Electronics. However, after BNK Investment & Securities, Kiwoom Securities also downgraded its investment rating on SK hynix, citing the possibility of a future earnings slowdown, raising some concerns about the semiconductor cycle. Domestically, the potential prolonging of the Samsung Electronics labor strike is also cited as a burden.
Exchange rate volatility is also cited as a factor worsening foreign fund flows. The won-dollar rate topped 1,500 won on the 15th, rising to the highest level in about a month. The recent six-day streak of gains in the exchange rate overlaps with the period when foreigners made daily net sales in the trillions of won in the domestic stock market. Analysts say the cycle of heavy foreign outflows driving a weaker won, which then prompts foreign investors to sell Korean stocks again due to concerns about currency losses, is repeating and amplifying market volatility.
Moon Da-un, a researcher at Korea Investment & Securities Co., said, "The biggest factor behind the exchange rate's rise over the past week is foreigners selling Korean stocks," and noted, "Along with uncertainty over Samsung Electronics' labor talks, bond yields have surged on growing fiscal concerns, dampening overall investor sentiment."
In the securities industry, the prevailing view is still that the moves are largely profit-taking after a short-term jump. With the KOSPI up nearly 15% this month, global asset allocation funds are mechanically trimming their Korea weight.
Kim Jae-seung, a researcher at Hyundai Motor Securities, said, "Overseas funds often automatically reduce exposure for rebalancing when a country or sector weight exceeds targets," and explained, "Mechanical net selling in the KOSPI is appearing amid the recent strength in Korean stocks and the semiconductor sector."
It is also notable that even as foreigners continue large net sales, the foreign equity share within the KOSPI has actually increased. Foreign equity share is calculated not by the simple number of shares held but by "the portion of market capitalization held by foreigners as a share of total KOSPI market capitalization."
Recently, gains in the KOSPI have been led by large-cap semiconductor stocks such as Samsung Electronics and SK hynix, where foreign ownership is high, meaning the value of remaining holdings has grown even faster despite some selling. In fact, foreigners' equity share by KOSPI market capitalization rose from 31% in November last year to 39.6% on the 14th.
Heo Jae-hwan, a researcher at Eugene Investment & Securities, said, "The current foreign equity share has surpassed the post-COVID peak of March 2020 and is the highest since 2005–2006," and pointed out, "Even though foreigners continue to be net sellers, the increase in the value of their holdings has been larger, so the equity share has actually risen."
In fact, while foreigners have made net sales of about 98 trillion won since the start of the year, their market capitalization holdings increased by about 1,092 trillion won over the same period. Since May, they have made net sales of about 30 trillion won, but their market capitalization holdings are estimated to have risen by about 354 trillion won.
However, some worry that if the macro environment continues to deteriorate with high oil prices and rising interest rates, foreign capital outflows could grow. Researcher Kim Jae-seung added, "For the time being, we need to watch the direction of global oil prices and interest rates," and said, "It is crucial whether the U.S. Government Bonds 10-year yield stays above 4.5% and the 30-year stays above 5%."