Since the start of the year, foreign investors have dumped more than 150 trillion won worth of shares in the domestic stock market, extending a record "sell Korea." While fears are growing in the market that foreigners are leaving in earnest, the view is stronger in the securities industry that this is a mechanical rebalancing (weight adjustment) of global funds rather than pessimism about the Korean stock market.
Market attention is shifting from "how long will they keep selling" to "what conditions must be met for foreign investors to return to net buying."
Global pension funds and passive funds manage assets in line with country-by-country target weights. If the Korean stock market rises more than other countries, the valuation swells and exceeds the target weight, and they trim the weight by taking profits. If the rally in the Korean market slows or other markets rise more, they increase Korea's weight again. However, because target weights differ by manager and are adjusted according to external conditions, there is no absolute standard such as "when the foreign ownership ratio reaches a certain percent, they buy again."
The securities industry also sees it as insufficient to explain this selling wave solely as mechanical rebalancing. Noh Dong-gil, a researcher at Shinhan Investment & Securities, said, "Some of it is profit-taking after big gains, but FX volatility and weakened sentiment toward U.S. tech stocks are also at work," adding, "It is hard to explain current foreign selling with rebalancing alone."
① KOSPI is expensive... other countries' indexes need to rise more
The first condition for foreigners' return is that the Korean market's relative appeal stands out again. The securities industry analyzed that foreign selling should not be interpreted simply through the KOSPI's ups and downs or changes in ownership share. The key is how attractively global funds assess Korea compared with other markets.
Yang Il-woo, a researcher at Samsung Securities, said, "Global investors tend to move money by comparing performances across countries rather than focusing on absolute returns."
In fact, in 2024, Taiwan's market outperformed Korea's, leading to an expansion of Korea weights by global funds, but this year the situation has reversed. As Korea's market far outpaced Taiwan's performance, investors moved to sell to realize gains, according to analysts.
Wi Jae-hyun, a researcher at Kyobo Securities, said, "Selling by passive funds does not end just because foreigners' ownership share falls or the KOSPI undergoes a sharp correction," adding, "What matters more is relative performance versus the Morgan Stanley Capital International (MSCI) emerging markets (EM) index that includes the KOSPI. Even though the KOSPI has fallen from its peak recently, relative returns are still high."
② Semiconductor earnings and "re-rating"
The second condition is qualitative improvement in corporate earnings. Many note, however, that absolute quarterly figures alone are not enough to win foreigners back.
Kim Jun-young, a researcher at iM Securities, said, "Foreign fund flows are a result, not a cause," adding, "Foreign investors will come back only when long-term confidence in the semiconductor cycle is restored and there is conviction that multiples can be re-rated."
Because semiconductors are a sector heavily affected by the economic cycle, it is more important to confirm the sustainability of long-term profits than to post temporary strong results.
Noh also viewed the sustainability of U.S. big tech's investment in artificial intelligence (AI) as a key variable. Noh said, "Skepticism about tech stocks needs to ease and there must be conviction that AI capital expenditures (CAPEX) will continue," adding, "The U.S. big tech earnings season starting in late July could be an important inflection point."
③ Need stability in the won-dollar exchange rate
The third condition is the exchange rate. Recently, the won-dollar rate has stayed high around 1,550 won. The securities industry expects that once the strong-dollar trend eases and the won stabilizes, the foreign selling offensive will also likely subside.
Noh said, "At its core, current foreign selling is profit-taking after big gains," but added, "If exchange-rate volatility and worries about tech stocks ease, the intensity of selling could gradually weaken."
④ Time matters more than MSCI
The final variable is structural events such as index inclusion. However, the short-term impact is seen as limited.
Korea again failed last month to be placed on the watch list for inclusion in the MSCI developed markets index. Even if added to the watch list, it typically takes two to three years to be included in the actual developed markets index, making it difficult to expect an immediate influx of large passive funds, analysts say.
Inclusion in the World Government Bond Index (WGBI) also did not lead to improved supply-demand in the stock market. Since the WGBI inclusion on Mar. 31, foreigners made a net purchase of 37.3 trillion won in Treasury bonds on a contract basis (Mar. 30–Jun. 26), but in the same period they were net sellers of 88 trillion won in the domestic stock market in the second quarter alone. In other words, money that flowed into the bond market did not spread to the stock market.
Experts agree that foreigners' net selling should be seen not as a sign of leaving Korea but as a process of adjusting weights in an overheated market. However, for foreigners to return to net buying, a combination of factors is needed: a recovery in Korea's relative appeal, confidence in the semiconductor cycle, exchange-rate stability, and improved global investor sentiment.