Foreign investors withdrew funds from Korea's stock market for an eighth consecutive month. Trade uncertainty widened ahead of U.S. President Donald Trump's planned reciprocal tariff measures, dampening global investor sentiment.
According to the Bank of Korea's International Financial and Foreign Exchange Market Trends report released on Feb. 22, foreign equity investment recorded a net outflow of $1.16 billion during February. That means more foreign investment flowed out of the stock market than flowed in.
Foreign equity investment recorded net outflows for eight consecutive months starting in Aug. of last year ($1.85 billion net outflow). The Bank of Korea said, "Net outflows continued as global trade uncertainty widened," adding, "However, the scale of net outflows narrowed compared with the previous month thanks to hopes for the semiconductor sector."
By contrast, bond funds recorded a net inflow of $4.83 billion, marking two consecutive months of positive flows. The Bank of Korea explained that reinvestment funds flowed in as carry trade incentives expanded, and demand for long-term bonds remained firm, widening net inflows.
Carry trade incentive refers to the profit foreigners can earn when they borrow dollars, convert them into won and invest in domestic bonds. The carry trade incentive widened from 15 basis points in Jan. (1bp=0.01 percentage point) to 31bp in Feb. and 36bp in Mar.
Total foreign securities investment, combining stocks and bonds, showed a net inflow of $3.67 billion. The scale of net inflows was the largest in 10 months since May of last year ($4.11 billion net inflow).
The average range and volatility (day-over-day) of the won-dollar rate in Mar. were 11.7 won and 0.81%, respectively. That was a sharp widening from the previous month (4.3 won and 0.29% each). The Bank of Korea said, "The won-dollar rate widened significantly under the influence of developments in U.S. tariff policy, among other factors."
Last month, the credit default swap (CDS) premium on Korean government bonds (based on 5-year foreign exchange stabilization fund bonds) averaged 33bp, up 2bp from the previous month. The CDS premium rose from 34bp in Nov. last year to 37bp in Jan. this year before falling sharply in Feb., but turned upward again last month. The CDS premium is the fee paid to guard against not recovering principal if a country defaults; a lower figure indicates a healthier condition.