On the 5th, the won-dollar exchange rate neared 1,550 won during intraday trading. Despite intervention by the foreign exchange authorities, the rate did not fall because foreign investors are continuing to sell Korean stocks.
The problem is that this situation could persist. In the past, when foreigners sold Korean stocks, Korea's weight in their overall portfolios also fell, eliminating the need to sell stocks for "rebalancing (temporary adjustment of investment weights)." When that happens, the exchange rate stops rising.
But this time is different. Even if foreigners sell stocks, the stock market boom has inflated the valuation of their holdings, keeping their weight relatively high. As a result, additional rebalancing is occurring, creating a vicious cycle that pushes the exchange rate higher.
◇ Foreigners' share of Korean market holdings climbs to the 38% range from 36% in 20 trading days
Foreign selling in our stock market has continued for 20 consecutive trading days from the 7th to today. During this period, they recorded a net sell-off of a total of 70 trillion won in the Korea Exchange (KOSPI).
Typically, if the market is not highly volatile, continued foreign selling reduces foreigners' ownership share. However, in the recent market, foreigners' ownership share expanded by 2.12 percentage points, from 36.05% on May 6 to 38.17% on June 4. In particular, foreigners' ownership share on the KOSPI topped 40% for the first time ever.
From foreigners' perspective, they have little choice but to keep selling to adjust their growing investment weight to an appropriate level. For example, the National Pension Service's target allocation for domestic stock holdings is 20.8%, and if the share drifts outside the permitted band due to a market boom, it is required to sell mechanically. Foreign investors also have target weights for the Korean market and must sell the portion that exceeds those targets. It is about risk aversion.
The government assessed that since the second week of May, foreign selling driven by such "rebalancing" has become the main driver of the sharp rise in our exchange rate. This differs from the pattern at the turn of the year, when "overseas retail investors" or National Pension Service overseas investments pushed the rate higher. A government official said, "There still appears to be considerable remaining demand for rebalancing."
◇ "Ownership share needs to fall at least 1–2 percentage points to finish rebalancing"
Inside and outside the government, the view is that for rebalancing to end, foreigners' ownership share in our stock market needs to decline at least another 1–2 percentage points. A market official said, "The current share in the 38% range needs to revert to around 35–36%, the historical average." The average foreign ownership share in May–June, when the rebalancing issue drove a sharp rise in the exchange rate, is 36.9%, while in January–April it was 34.1%, a difference of 2.8 percentage points.
However, 35–36% is not an absolute benchmark. Each foreign investor's target weight differs, and the target itself can change depending on the outlook for returns in the Korean stock market.
Even if rebalancing ends, the remaining variable is the "Middle East war." A government official said, "The primary timetable for defending the exchange rate depends on whether foreigners' equity ratios revert," adding, "Even after such shocks subside, external uncertainties such as the Middle East war could keep the rate elevated, so the government is closely watching."