Preference for Risk-free Assets Increases
As the Korean economy is slowing down amid growing concerns about a global economic downturn, foreign investors are withdrawing their funds from the domestic stock market for investment in bonds, which are risk-free assets.
Foreign investors net sold 2.48 trillion won (US$2.10 billion) worth of KOSPI stocks in May, the biggest single-month selling this year, according to Korea Exchange (KRX) on June 4. The figure exceeds 3 trillion won (US$2.54 billion) when KOSDAQ shares are included. Foreign investors net purchased 4.05 trillion won (US$3.42 billion) in January, the largest single-month buying in 45 months since April 2015, and continued to buy domestic stocks until April.
However, foreigners’ buying spree began to lose steam in May. One reason was the renewed trade dispute between the United States and China, which resulted in intensified retaliatory tariffs against each other. Another reason was the worsening economic indicators of major countries.
Unlike foreign investors who perceived risks, retail investors net bought 2.80 trillion won (US$2.37 billion) worth of domestic stocks last month, betting on buying at low prices, but the KOSPI index fell as much as 7.34 percent, causing more losses to them
With growing uncertainty over the economy at home and abroad, market funds from not only individual investors but also foreigners flowed into bonds. With the dim outlook for the global economy, investors who expected lower interest rates and higher bond prices flocked into the corporate bond market. Demand for even BBB-rated corporate bonds exceeds supply. Doosan Infracore Co., South Korea's leading construction equipment maker, sought to issue 40 billion won (US$33.81 million) worth of corporate bonds early last month, but it has decided to increase the size of issuance to 70 billion won (US$59.16 million) as subscriptions amounted to 120 billion won (US$101.42 million). Although it has the BBB credit rating, its interest rate was 4.523 percent, high enough to attract investors, according to market experts.
Foreign investors are also buying domestic bonds, which are considered safe for an emerging country. Foreigners net purchased a total of 10.58 trillion won (US$8.94 billion) worth of bonds, including 6.68 trillion won (US$5.64 billion) of government bonds and 3.62 trillion won (US$3.06 billion) of monetary stabilization bonds, on the over-the-counter bond market in May, according to data from the Korea Financial Investment Association. It is the highest figure since the association started to compile statistics in 2006. The size of net purchases is similar to the 10.37 trillion won (US$8.76 billion) posted in June 2009 and 10.06 trillion won (US$8.50 billion) in October the same year during the global financial crisis. It means that investors’ preference for risk free assets has surged.