An ironic situation unfolds as foreign investors are rapidly withdrawing their investments from the domestic stock market, while the foreign ownership percentage of the total market capitalization on the KOSPI hits a 20-month high.
According to the Korea Exchange on Oct. 22, the foreign ownership ratio of the entire KOSPI market capitalization reached 32.68 percent as of the closing price on Oct. 20. This is the highest level in 1 year and 8 months since it reached 32.68 percent on Feb. 22 of last year.
The foreign ownership ratio of the KOSPI market capitalization, which stood at only 30.82 percent on the first trading day of this year on Jan. 2, reached 32.33 percent on May 30. This was achieved thanks to foreign investors’ net buying of 15.56 trillion won (US$11.5 billion) in total during the first five months of the year. Even in the monthly breakdown during this period, foreign investors recorded “positive” net buying on the KOSPI for five consecutive months. Subsequently, the decline in the foreign ownership ratio in market capitalization, from 32.19 percent on June 1 to 31.15 percent on Aug. 31, is consistent with the actions of foreign investors, who exhibited a net selling of shares amounting to 3.13 trillion won.
The focal period of interest is from September to the current point in time. During this time, the foreign ownership ratio in market capitalization has surged to its peak. Surprisingly, foreign investors have recorded net selling of 2.4 trillion won on the KOSPI market, showing signs of “Sell Korea.”
Experts point out that this phenomenon occurred because, despite the KOSPI showing weakness, the return on stocks held by foreign investors has been relatively favorable compared to individuals and other investment entities.
An analysis of the returns on the top 7 stocks in terms of net purchases by foreign and individual investors from Sept. 1 to Oct. 18 confirms this assessment.
During the period, despite a -7.09 percent decline in the KOSPI index, stocks related to sectors where foreign investors concentrated their net buying recorded relatively high returns. These sectors included Samsung Electronics, ranking first with a 2.84 percent increase; Kia, ranking second with a 1.87 percent increase; KT, ranking fourth with a -1.06 percent decrease; Hana Financial Group, ranking sixth with a 9.73 percent increase; and Woori Financial Group, ranking seventh with a 5.21 percent increase in the financial sector.
Contrastingly, the returns on stocks purchased with a focus on the “secondary battery” sector by individual investors, during this period, saw double-digit declines and did not even reach the KOSPI’s average performance.
It not only highlights the variance in returns among different types of investors but also underscores the “polarization” of returns between large-cap and small-cap stocks in the domestic stock market this year.
A securities industry insider said, “The majority of foreign investors are channeling their investments into the top 20 large-cap stocks in the KOSPI market. The small-cap stocks in the KOSPI market are effectively being handled by individual investors.”
While KOSPI market capitalization decreased by 6.94 percent from Sept. 1 to the previous day, foreign ownership in market capitalization only reduced by 4.88 percent. In contrast, the decline in market capitalization held by individual and institutional investors, excluding foreigners, was a significant 7.90 percent. This indirectly highlighted the substantial difference in returns between large-cap and small-cap stocks.
Some voices are evaluating that the polarization of individual stock performances deepening has led the domestic stock market from a bull market to a bear market. Shin Joong-ho, research center director at eBEST Investment & Securities, explained, “In an overall bullish market trend, even in cases where all stocks are rising, small and medium-sized stocks tend to exhibit higher increases. In contrast, during a downturn, the decline in small and medium-sized stocks is much more significant compared to large-cap stocks.”
However, some analysts believe that the current trend of maximizing the foreign ownership ratio in the KOSPI market may not be a prolonged one. Director Shin stated, “Externally, the emergence of high-interest rates, rising U.S. bond yields, and a strong dollar phenomenon, along with internal factors such as a deteriorating trade balance, including recession-induced surplus, and downward adjustments in economic growth rates, are raising questions about the fundamentals of the Korean economy. These factors are rapidly cooling foreign investors’ sentiment. If various risks persist and the foreign exodus continues for a while, the foreign ownership ratio in market capitalization will eventually decline. At that point, the likelihood is high that such a phenomenon will be felt when the downside risks are already maximized.”