A Strong Preference for Risk-free Assets

Foreign investors are buying up South Korean  bonds while selling off Korean stocks. 

Foreign investors are selling off South Korean stocks amid an escalating trade conflict between the United States and China and an intensifying conflict between Hong Kong and mainland China, while increasing their investment in South Korean bonds.

Foreign investors net invested 5.40 trillion won (US$4.45 billion) in won-denominated bonds this month, according to investment banking (IB) industry sources on Aug. 27. Accordingly, the balance of foreigners’ won-denominated bond holdings reached a record high at 126.30 trillion won (US$104.09 billion) as of Aug. 23, surpassing the 126 trillion won mark for the first time on Aug. 20.

Foreigners bought up South Korean bonds even on Aug. 26 when the stock market at home and abroad turned bearish due to the rekindled trade war between the United States and China. This reflected a stronger preference for risk-free assets among investors. In contrast, foreign investors sold 2.70 trillion won (US$2.23 billion) worth of South Korean stocks, including 2.40 trillion won (US$1.98 billion) of stocks on the benchmark KOSPI market and 300 billion won (US$247.20 million) on the secondary KOSDAQ market.

Market experts said concerns over the U.S.-China trade war and the U.S. economic slowdown have stimulated the investor sentiment for risk-free assets and encouraged foreign investors to rake up won-denominated bonds. Another force behind this is expectations for a rise in the won/dollar exchange rate and lower interest rates. The U.S. dollar traded for 1,217.80 won on Aug. 26, up 9.15 percent from 1,116.70 won at the end of last year.

Kang Seung-won, an analyst of NH Investment & Securities Co., said, “It seems that foreigners took the rise in the won/dollar rate as a chance to purchase bonds at low prices. In general, a skyrocketing currency exchange rate is considered as a risk in emerging countries. However, foreigners seem to believe that there are no default risks on South Korean government bonds. This is the strong evidence that foreign investors regard government bonds as risk-free assets.”

If the trade dispute between the United States and China deepens, the value of the won is expected to go down further. Chang Jae-chul, the chief analyst at KB Securities Co., said, “The Chinese yuan is forecast to fall to 7.3 per dollar because of higher levels of U.S.’ tariff retaliation. The weak yuan will weaken currencies in Asian emerging markets, including the Korean won.”

Expectations for a fall in benchmark interest rates also acted as a variable. The interest rate on bonds shows a downward trend as it reflects lower benchmark interest rates in advance. A decline in bond interest rates means a rise in bond prices. The annual interest rate on 3-year government bonds fell from 1.8 percent earlier this year to 1.093 percent this month, reaching a record low.

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