South Korea’s Kospi market is grappling with extreme volatility, approaching record highs, following a substantial $13.2 billion selloff by foreign investors. This massive outflow led to a 4% intra-day plunge and briefly activated a trading curb, as strategists at Citigroup expressed concerns about market exuberance amid rising global bond yields and geopolitical tensions.
South Korea's benchmark Kospi index has experienced a sharp surge in market volatility, reaching near record highs, following a massive $13.2 billion selloff by foreign investors in local equities last week. This significant capital flight triggered dramatic swings in the Kospi, culminating in a brief trading halt on the exchange.
Key Points
- Kospi volatility escalated, approaching record levels, after foreign investors offloaded $13.2 billion in Korean stocks over the past week.
- The Kospi briefly plunged 4%, extending Friday's 6% decline amidst substantial foreign capital outflows.
On Monday, the Kospi initially plummeted by as much as 4% during early trading, building on Friday's 6% tumble. Goldman Sachs characterized Friday's rout as having "erased weekly gains amid Trump-Xi Summit and strong foreign outflows."
The Kospi Volatility Index jumped 2.56% on Monday, nearing peaks observed in early March.
Data from Goldman Sachs indicates that overseas investors withdrew approximately $17 billion from emerging Asian markets, excluding China, last week. This marks the second-largest weekly outflow on record, with South Korea accounting for the majority ($13.2 billion), followed by Taiwan ($2.5 billion).
To temper the market's turbulence, South Korea's exchange temporarily paused some program trading on Monday. A "sidecar" mechanism was activated after Kospi 200 futures dropped 5%, halting automated trading activity for five minutes.
This reversal comes after the Kospi index impressively surged past the 8,000 mark last week, driven by excitement around artificial intelligence (AI)-related stocks, chipmakers, and strong retail investor momentum.
Strategists at Citigroup noted that the Korean market now appears "much more overbought than in the U.S.," prompting the bank to reduce its exposure to its previously bullish Korea trade. "While we think we are too early in the tightening of financial conditions to get a severe pull back or end of the bull market thanks to rates, Kospi appears much more overbought than in the U.S. and prudence suggests we take profits on half our position," Citi strategists explained.
The bank highlighted that Korea is displaying more "exuberance" warning signs from local retail investors. This demographic has become a key buyer of South Korean equities this year, frequently investing through margin trading and leveraged exchange-traded funds.
While this doesn't signal the end of the Kospi's rally, "it does mean that risks have risen," Citi concluded.
These observations highlight a growing apprehension that increasing global bond yields and geopolitical tensions are starting to impact some of Asia's top-performing equity markets. Citi pointed to a "break-out in backend yields" globally, with both Japanese government bond yields and UK gilt yields rising sharply amid worries over persistent inflation and elevated oil prices linked to the Iran conflict.
Despite the concerns, both Citi and Goldman Sachs foresee the potential for South Korea's rally to persist. Goldman estimated that Korean retail traders purchased $14.1 billion worth of equities last week. Citi, while taking profit on half of its Korea trade, is not exiting entirely, as it anticipates the market will be among the largest beneficiaries of passive inflows tied to index provider MSCI's upcoming rebalance.
