The dependence of South Korean stock market on foreign investors is decreasing. Foreigners have been continuously purchasing South Korean stocks from last year unlike individual and institutional investors. However, foreigner’s buying spree now has a lower relevance to a rise in the KOSPI index or specific stock prices.
According to the Korea Exchange on Feb. 4, foreign investors net bought 1.23 trillion won (US$1.13 billion) worth of stocks from Jan. 1 to Feb. 2. This is in contrast to individual and institutional investors that net sold 1.16 trillion won (US$1.06 billion) and 883.2 billion won (US$811.76 million) worth of KOSPI stocks over the same period. Foreigners purchased a net 10 trillion won (US$9.19 billion) worth of domestic stocks last year as well, while individual and institutional investors sold 8.66 trillion won (US$7.96 billion) and 4.22 trillion won (US$3.88 billion). Foreign investors practically dominate the supply and demand of South Korean stocks in terms of net purchases alone for two years in a row from last year.
However, foreigners have less influence on the indexes and direction of stock prices than in the past regardless of the amount. In the past, the KOSPI index increased and some specific stocks showed a rise in prices when foreigners bought them, but it’s not the case anymore. Seo Seung-bin, an analyst at KTB Investment & Securities, said, “The average correlation coefficient between a net purchase of foreign investors and an increase in the KOSPI index after 2012 stood at 0.77 but it has gradually decreased after 2017. There is no causal relationship between a net purchase of foreign investors and fluctuations of KOSPI stock prices on a monthly basis.” The size of the domestic financial market, including market capitalization, grew itself compared to the past and various institutional investors, including pension funds, now have more influence on the supply and demand of domestic stocks. Accordingly, foreign investors see their influence on the stock market drop.
However, exchange rates can be a variable in the correlation between the supply and demand of foreigners and the KOSPI. In short, things will change when foreign investors greatly increase a portion of domestic stock purchases with a continuous decrease in the won-dollar exchange rate. Seo said, “The supply and demand of foreign investors are most likely to change according to the won-dollar exchange rate. When the won-dollar exchange rate continue to show a downward trend, foreigners are highly likely to continuously net buy KOSPI stocks and play mainly with large-cap stocks.”
As the won-dollar exchange rate, which had plunged from last year, recently show stability, the improvement in foreigners’ supply and demand caused by the falling exchange rate will not be shown immediately. In fact, the won-dollar exchange rate closed at 1,079.7 in the Seoul foreign exchange market on the 2nd. The figure was up 1 percent from 1,070.5 won at the beginning of the year. Notably, it has been going up every day except for one trading day after it reached a record low at 1,058.6 on Jan. 25.