Foreign investors have surprisingly offloaded billions of dollars in South Korean stocks this year, even as the Kospi index reached record highs. This paradox is largely attributed to “forced selling” by active fund managers adjusting portfolio weightings and regulatory limits, rather than deteriorating fundamentals.
Goldman Sachs estimates over $62 billion in foreign outflows by late May, yet robust domestic buying has largely offset this, with market experts maintaining a bullish outlook on the strong fundamentals of Korean equities.
In a surprising twist, foreign investors have offloaded billions of dollars worth of South Korean equities throughout this year, even as the benchmark Kospi index has delivered a standout performance, hitting record year-to-date gains.
The selling pressure was particularly intense on Monday, with the Kospi plummeting over 8% at the open. Data from the Korea Exchange reveals that overseas investors shed a net 1.24 trillion won (approximately $801 million) in Kospi-listed shares as of 11 a.m. Singapore time. Goldman Sachs analysts noted this trend, stating in a June 5 report, "Foreign investors continued to sell the Kospi market, driven by outflows for Kospi Tech and Auto."
A currency dealer monitors exchange rates in a trading room at KEB Hana Bank in Seoul on June 21, 2021.
Credit: JUNG YEON-JE | AFP via Getty Images
Market experts widely believe this significant foreign divestment is less a reflection of deteriorating economic fundamentals and more a byproduct of the market's own impressive rally. Chetan Seth, Nomura's Asia-Pacific equity strategist, characterized this as "essentially forced selling" by investors and clients.
As Korean stocks surged, their increased weighting within global and emerging-market benchmarks has compelled many active fund managers to trim their holdings. This ensures they remain within their established portfolio and risk parameters, as explained by various investors to CNBC. This "structural pressure" has been observed for months, with Goldman Sachs estimating net foreign outflows from the Kospi reaching roughly $62 billion by late May.
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'Structural Pressures' and Concentration Risks
Nomura's Seth drew parallels to India's market in recent years, where a surge in domestic retail participation gradually displaced foreign investors. He anticipates a similar dynamic unfolding in Korea, suggesting foreign investors may be biding their time for more attractive entry points post-pullback.
Nick Wilcox, managing director for discretionary equities at Man Group, echoed this sentiment, underscoring how Korea's swift rise in emerging-market indices has created inherent structural challenges for international investors. He further pointed out that some investors are encountering regulatory limits on their ownership stakes in individual companies, particularly after the significant appreciation of Korea's largest firms like Samsung Electronics and SK Hynix.
The Kospi Index Performance (Year-to-Date)
Source: CNBC.com
Despite these outflows, the Korean market has found strong support from a wave of domestic buying. Wilcox highlighted an estimated $70 billion in retail inflows this year, coupled with a sharp increase in brokerage account openings, effectively offsetting the foreign selling pressure.
While the selling also indicates concerns over risk concentration, given the rally's reliance on giants like Samsung Electronics and SK Hynix, market veterans remain optimistic about Korea's underlying fundamentals. "I don't get a sense that investors are taking a negative view on Korea, right? So... I think it's mechanical right now," Seth affirmed.
Reinforcing this positive outlook, Goldman Sachs maintained its bullish stance on Korean equities. In a report published Friday, the firm raised its 12-month Kospi target to 12,000, projecting a further 37% upside.
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