In the first half of this year, foreigners were net sellers of $150 trillion won worth of stocks in the main board, unloading shares at a record pace. Brokerages said this reflected profit-taking after a sharp rally and a global rebalancing of funds (weight adjustment) rather than pessimism about the Korean market.
The key is that this kind of weight adjustment is still underway. Individuals have been buying what foreigners sold day after day, but whether that individual buying power will continue in the second half is seen as the biggest variable for the market's direction.
On the 3rd, according to the Korea Exchange (KRX), foreigners extended their net selling in the main board to 10 straight sessions through the previous day. Cumulative net selling in the first half totaled 150.464 trillion won. With heavy selling continuing that day, the cumulative figure reached 155 trillion won. On the 29th of last month, they set a new daily record by net selling 7.7332 trillion won in a single day.
The dominant view is that foreign selling is more a process of trimming an expanded allocation to domestic stocks after a surge than an exit from the Korean market. Global pension funds and asset managers run portfolios to meet country and asset targets, and the steep rise in Korean stocks has made it inevitable to cut weights.
In fact, the foreign ownership ratio has expanded from around 35% at the start of the year to about 40% now. Despite large-scale selling, the ownership ratio increased because the pace of valuation gains in stocks held by foreigners outstripped the amount sold. In particular, the sharp jump in semiconductor blue chips such as Samsung Electronics and SK hynix greatly boosted the value of foreigners' asset holdings.
Han Ji-young, a Kiwoom Securities researcher, said, "We should avoid interpreting this net selling as pessimism about the Korean market or a bet on a memory downcycle peak-out," adding, "It is reasonable to see it as profit-taking by active foreign funds."
However, it is hard to say the rebalancing is over. With foreign ownership still high, there is a chance of additional selling to meet target allocations. It is also a burden that about 134 trillion won of the 149 trillion won in first-half foreign net selling was concentrated in semiconductors. There could be further profit-taking focused on stocks with high foreign ownership, such as Samsung Electronics and SK hynix.
Moon Da-un, a Korea Investment & Securities Co. researcher, said, "Until KOSPI's upward momentum cools, the trend of paring back the expanded holdings of domestic stocks is likely to continue," adding, "It will not be easy to expect foreigners to turn to net buyers of domestic stocks in the second half."
The exchange rate is also a factor. When the won-dollar rate rises, foreign funds tend to leave on concerns about currency losses. Indeed, since May, when the rate began to climb in earnest, foreigners have been net sellers of more than 90 trillion won in domestic stocks.
Researcher Moon said, "As uncertainty over U.S. monetary policy eases, dollar strength is likely to calm over the long term, but until a turn to a weaker dollar is confirmed, elevated exchange rates and pressure on foreign flows are likely to persist."
Individual investors absorbed the foreign selling. Since the start of the year, individuals have bought more than 97 trillion won in stocks, offsetting a large portion of selling by foreigners and institutions.
Recent inflows are analyzed to be the result of multiple factors, not just an increase in margin deposits, including growth in household income, reallocation of financial assets, liability financing, and movement of real estate funds. As expected returns in the domestic market have risen, there is an interpretation that a "money move" of individual funds into stocks has begun in earnest.
Kim Jae-woo, a Samsung Securities researcher, said, "Considering rising household income and expanded investment, as well as room for further reallocation of personal assets, individuals' MoneyMove is likely to continue," adding, "Portfolio rebalancing in retirement pensions could also support a shift of funds into the domestic market."
However, many note that it is difficult for individual funds alone to endlessly absorb what foreigners offload. Although individuals, retirement pensions, and ETFs are forming a domestic defense line, if foreign selling persists, the supply-demand balance could break.
Noh Dong-gil, a Shinhan Investment & Securities researcher, said, "The index rose even as foreigners sold not because foreign flows no longer matter, but because individuals and the product market absorbed the same leaders and held on," adding, "In an environment of sustained high exchange rates, earnings growth and expanded shareholder returns will be the key factors to draw foreign funds back."