Foreign Investment in Korean Stocks Turns into a Net Inflow

Foreigners’ investment in Korean securities turned into a net inflow in July. During the same period, the won/dollar exchange rate rose and interest rates in major advanced countries plunged.

Foreign investment in Korean stocks switched to a net inflow of US$160 million in July as investor sentiment improved on expectations that the U.S. Federal Reserve will adjust the pace of tightening and major U.S. companies announced higher-than-expected earnings, according to a report released by the Bank of Korea on Aug. 11. The net inflow of foreigners' bond investment increased due to an inflow of public funds.

The won/dollar exchange rate soared in July despite Korea's rate hike of 50bp as the U.S. dollar strengthened due to concerns over an economic slowdown in the eurozone. On July 15, the rate peaked at 1,326.1 won, the highest since April 29, 2009 when it hit 1,340.7 won. Although the pace of the exchange rate rise slowed following the July FOMC meeting, it is showing an upward trend again this month due to escalating tensions between the United States and China following U.S. House Speaker Pelosi's visit to Taiwan and hawkish remarks by U.S. Fed officials.

In July, the spread on Korean banks' borrowings rose from the previous month. Credit default swap (CDS) premiums for Korea's currency stabilization bonds also continued to rise moderately. The premiums rise when the probability of a bond default increases. They rise when economic conditions become tough. "The monthly flow of CDS premiums shows that they fell from above 50bp in early July to 40bp at the end of July, and stood at 39bp as of Aug. 9," the Bank of Korea explained.

The average daily foreign exchange transaction volume in among Korean banks in July stood at US$30.94 billion, down US$1.91 billion from US$32.85 billion in the previous month.

In July, steep drops were marked in interest rates in major developed countries’ 10-year government bonds. The rate in the United States fell steeply due to concerns about an economic slowdown caused by sluggish economic indicators such as GDP and expectations that the U.S. Federal Reserve will adjust the pace of belt tightening. Germany also saw its interest rate fell sharply as concerns about an economic slowdown soared due to a possible reduction in the supply of natural gas from Russia.

Interest rates in most emerging markets also fell. In Brazil, bond yields fell due to expectations that the pace of belt tightening by the central bank will slow down in the future. Bond yields fell in India as inflation concerns were eased thank to falling oil prices.