Foreign investors dominated all Korean market sectors, including equity, derivatives, and fixed income markets with magnificent profits last year. The Korean economy has recovered relatively quickly from the global recession for last couple of years, which is closely related with housing market slump in the United States, hyperinflation in Zimbabwe and Iceland, and the ‘sandcastle’ of Dubai. However, this fertile recovery has been solely exhausted by the profits of foreign investors.
The KOSPI, which spiked to a 15-month high last September with a steep rally was a cash cow for them, resulting in approximately 90 trillion won flowing their pockets. The KOSPI grew by 50% from the market bottom of February 2009. The value of shares that foreign investors hold represents 289.724 trillion won in terms of market capitalization as of December 2009, which is 73% (124 trillion won) higher than 165.7996 trillion won of late 2008, according to the Korea Stock Exchange. The net buying of foreign investors, by the way, from the increment, 124 trillion won, was reckoned at 32.3 trillion won. This means the rest of them, 92 trillion won including unrealized balance of the appraised profits, are recorded as the net profit of the foreign investors. To be brief, they put 32.3 trillion won, and they earned 92 trillion won.
The debacle of private investors and agencies of Korea came up with 2.294 trillion won and 26.2716 trillion won of net loss, respectively, whilst foreign investors enjoyed the sweetest fruits ever in the Korean markets.
Foreign investors were also better at stock-picking over private investors and Korean agencies. The average rate of return of the top 20 stocks that foreign investors purchased in 2009 is 89.5%, which is higher than 78.2% for agencies and 18.8% for private investors. The average rate of return for private investors doesn’t even meet the average return of KOSPI index as a whole.
Peripheral fields, including currency, interest rate, and derivatives markets were further cash mills for foreign investors. The derivatives market was extremely dichotomized with the loss of agencies and private investors, and the profit of foreign investors because of the market’s unique characteristics as a zero-sum game.
According to Bank of Korea, 6.53 billion dollar loss of agencies and private investors was recorded from January through November of last year, which is exchangeable to eight trillion won in the basis of the exchange rate on average annually. The loss increases to 18.3 billion dollar (24 trillion won), as the calculation begins from the point at which global credit crunch jutted out as Lehman Brothers filed for Chapter 11 bankruptcy protection on September 2008.
The balance sheet of the derivate investment market, however, might not accurately reflect the reality because it is estimated based only on the realized amount, and the appraised value of the derivatives. Also, since currency hedging trades raged in last year, such as forward exchanges and KIKO trades, were not completely reflected in the balance sheet, the scope of loss will be volatile with the high possibility of magnification.
The bonds market in 2009 was another field in which foreign investors played a remarkable role as it recorded record-high buying of 52 trillion won. Buying Korean treasuries was an effective way to make relatively sound gains for foreign investors amid the tedious medium-term trading of the world’s two largest bonds markets; Germany and the United States.
It is not easy to calculate precisely foreign investors’ profits because of the complicated properties of the market comparing to the stock market, such as existence of maturity, and the difference in interest rates between long-term bonds and ones with shorter terms, according to economists. A rough estimation is possible, nonetheless, based on the Monetary Stabilization Bonds, a short term government treasury issued by Bank of Korea, in which 80% of the total size of foreign investors was focused. The result reveals 3.4 trillion won in gains derived from the difference between the multiplication of the monthly net inflow (net buy - matured return) of foreign investors and the monthly return index of the Monetary Stabilization Bonds in average, and the net inflow.
There are oversimplified features widening differences between the estimation and the reality, such as solidifying the sources of estimation with the Monetary Stabilization Bonds, and the omission of the estimated gains on the vested bonds that they have been holding.
There is the possibility of statistical error, especially when the estimation is only based on mean calculation. Also, differences in the interest rates by diversified maturities of bonds and high frequency in the OTC (Over the Counter) market transactions might make the estimation erroneous.