As the United States central bank is now poised to raise interest rates at a faster-than expected pace, U.S. investment funds could rush out of South Korea, dealing a blow to the local stock market, analysts warned. When the U.S. jacks up its interest rates three to four times this year, which will lead to a reversal of key rates in the two countries, it can prompt American investors to exit South Korea in search of higher returns.
U.S. investors’ South Korean stock holdings take up more than 40 percent of all stocks owned by foreigners. American Investors have been buying local stocks every year for nine years since the U.S. Federal Reserve has started the so-called zero-rate policy that sparked an overseas exodus of funds to seek higher returns.
According to the data from the Financial Supervisory Service (FSS) on Feb. 7, U.S. investors held 265.12 trillion won (US$244.35 billion) worth of stocks listed in South Korea as of the end of 2017, hitting a record high. The figure accounted for 41.7 percent of all foreign-owned stocks at 635.93 trillion won (US$586.11 billion). It was also nearly five times higher than British investors’ stock holdings.
British investors came second with 48.32 trillion won (US$44.54 billion), trailed by Japanese with 15.28 trillion won (US$14.08 billion) and Chinese with 11.6 trillion won (US$10.69 billion). Among Middle Eastern investors, Saudi Arabia ranked first in terms of stock holdings with 11.9 trillion won (US$10.97 billion), followed by the United Arab Emirates with 9.38 trillion won (US$8.65 billion).
The volume of US investment has increased by 4.1 times from 64.51 trillion won (US$59.45 billion) in 2008 when the Fed began its zero-rate policy. The Fed put its benchmark rate between 0 and 0.25 percent in December 2008 to overcome the global financial crisis sparked by the collapse of Lehman Brothers. After that, there was an abundance of liquidity in the market and U.S. funds flew into emerging countries as well as advanced countries around the world.
In particular, a fair amount of money was invested in South Korea. Starting with 7.4 trillion won (US$6.82 billion) of the net purchase in 2009, a year after the Fed carried out the zero-rate policy, U.S. investors had become a net buyer of South Korean stocks for nine years in a row until last year.
They net bought stocks worth over 13 trillion won (US$11.98 billion) last year, becoming a major force behind the local bourse’ strong rally. Considering that the total amount of net purchases by foreign investors was just over 10 trillion won (US$9.22 billion), U.S. funds took a huge part.
U.S. investors net purchased 65.84 trillion won (US$60.68 billion) worth of South Korean stocks for nine years from 2009 to last year.
However, there is growing concern that U.S. investors in South Korean stocks may flee the local market due to a rate reversal between Korea and the U.S. as analysts recently said the U.S. can raise its benchmark interest rates faster than expected.
There is a dominant opinion that the Fed would increase its interest rates three or four times after the first one in March this year. On the other hand, South Korea’s central bank is expected to raise the key rate only once or twice this year in consideration of large household debt.
In this case, the rate between the U.S. at 1.25 percent to 1.5 percent and South Korea at 1.5 percent will reverse for the first time in 10 years.
When the U.S. tightens the purse strings further and the U.S. dollar continues to be strong, it will raise concerns over foreign funds leakage and some of funds invested in South Korean stocks in the past nine years can leave the country, having a negative effect on the local stock market.
To be sure, the interest rate is not the only factor that determines the flow of funds. South Korea has a sound fundamental and there are still high expectations for domestic companies’ performance, though they are not as high as last year. The market analysis that the South Korean stock market will be attractive this year as well will lower the possibility of the outflow of foreign funds.