"Sell Korea" has become a reality after the US benchmark interest rate exceeded that of Korea in March.
The Financial Supervisory Service (FSS) said on July 16 that foreign investors sold their Korean stocks worth 715 billion won in June, extending their net selling streak to three months.
Foreign investors net bought 123 billion won worth of stocks in March but net sold in April (2.204 trillion won) and May (380 billion won) after the reversal in the benchmark interest rate between Korea and the US in March.
Foreign investors net sold Korean stocks amounting to about 3.3 trillion won in the April-June period. The aggregate value of their stock holdings decreased to 596.9 trillion won.
Analysts say that the won-denominated interest rate (foreign exchange swap rate) fell due to the reversal and foreign investors have started arbitrage to earn profits from currency trading and offset low interest rate income in Korea.
The problem is that the base rate gap between Korea and the US increased to 0.5 percentage point due to the US Fed’s rate hike of 0.25 percentage point in June. There is concern that foreign investors' exodus will be prolonged.
"The escalation of the US-China trade conflict is fueling a general preference for safe assets and avoidance of risky assets," said Lee Chang-sun, a senior research fellow at the LG Economic Research Institute. “Compared to the US economy, the Korean economy is in worse shape and consumer prices are low. I think foreign investors regard Korean stocks as risky assets."
"Foreign investors’ selling of Korean stocks will depreciate the Korean won, making it difficult to expect a rebound of the Korean stock market," Lee said. "However, we expect some rebound to come as foreign investors are unlikely to maintain their selling spree until the end of the year."
Foreign investors' bond investment has continued a net inflow since January, with their balance reaching 110.562 trillion won as of the end of June. The balance accounted for 6.4% of the total listed bonds, the highest ratio ever. It seems that foreign investors increase bond investment because bonds are a relatively safe asset compared to stocks. The balance increased by 3.266 billion won in May and by 2.06 trillion won in June.