The South Korean stock market is expected to rely more on foreign investors this year as the National Pension Service (NPS) will reduce investment in domestic equities and the public offering funds market is forecast to contract. As the number of ailing listed companies also increased further last year, the number of companies to be delisted in the future will rise even more.
These forecasts were presented during the “Stock Market Trend and Major Issues for 2019” seminar hosted by the Korea Capital Market Institute (KCMI) in Yeouido, Seoul, on Jan. 23.
Kim Joon-suk, head of the capital market division at the KCMI, said, “As the NPS is decreasing the proportion of its investment in domestic stocks and the form of funds trading is changing as well, the net purchase of domestic institutional investors in response to the net sale of foreign investors is slowing.”
The NPS, which is considered a “safety valve” of the South Korean stock market, increased the proportion of overseas stocks in its total stock investment from 27 percent in 2010 to 50 percent last year and it also announced to increase the figure further in the future.
In addition, investment trust companies, or public offering funds, had a strong buy tendency when foreign investors went on a buying spree. However, such trend has weakened since the second half of 2017.
One of the reasons is that investors' confidence has been shrunk due to the recent bearish market. However, the biggest reason is that the size of capital flow decreased as the investment behavior has become passive. In other words, investors now follow the index itself. Kim said, “Foreign investors sold a considerable amount of domestic shares but domestic institutional investors did not make a corresponding net purchase. This is why the stock market experienced a big drop last year.”
However, the size of foreigners’ net sale is gradually falling, according to market experts. Foreign investors net bought nearly 1.50 trillion won (US$1.33 billion) in the KOSPI market from the beginning of the year. Kim said, “When the domestic economy gets into a period of stagnation from a period of slowdown, foreigners tend to buy more domestic stocks.”
Meanwhile, an increasing number of listed companies had become insolvent last year. The percentage of listed companies which went into the red or capital impairment to the total on both the KOSPI and KOSDAQ markets grew from 28 percent in the third quarter of 2017 to 34 percent in the third quarter of last year. The return on equity of listed companies which ranked among the bottom 10 percent in terms of profitability dropped from minus 15 percent to minus 22 percent over the same period.
Kim said, “More and more listed companies are highly likely to be delisted in the future. It is necessary to strengthen regulations, such as disclosure and oversight.” In particular, the listing expansion of innovative companies led by the government has not shown definite results. Analysts say it can increase the number of insolvent companies on the Seoul bourse.
The profitability of listed companies is also getting worse. The net profit forecast of companies listed on the KOSPI for this year went down by about 14 percent from 148 trillion won (US$131.15 billion) early last year to 127 trillion won (US$112.54 billion) at the end of last year. The KCMI said that the net profitability showed a remarkable decline especially when excluding Samsung Electronics Co.