Is the Inflow of Foreign Capital Due to a Weak Dollar?..."COVID-19 Must Also Be Considered"

Foreign Inflows Lead KOSPI... Dollar Weakness Plays a Role
Increased Interest in Emerging Markets with Slowing COVID-19 Case Growth
Overseas Markets Falter... 'Seohak Gaemi' Return Likely↑

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Foreign investors led the bullish market last week (September 9-13) by net buying stocks worth 2.3476 trillion KRW in the KOSPI market. Analysts suggest that this trend is not only due to the simple weakness of the US dollar but also influenced by the impact of the novel coronavirus disease (COVID-19).

On the 15th, KB Securities analyzed that foreign demand drove the market direction. Recently, although the scale of net buying and selling by foreigners was smaller than that of individuals, the market fluctuations followed foreign demand. September 30 is a representative example. On that day, foreigners net sold 978 billion KRW while individuals net bought 1.414 trillion KRW in the KOSPI, yet the index plunged sharply by 2.6%. On October 5, foreigners net bought 1.135 trillion KRW and individuals net sold 1.622 trillion KRW in the KOSPI, but the index rose by 2.4%. From October 6 to 13, the KOSPI rose about 2.9%, reaching a new high. During this period, foreigners net bought 2.3476 trillion KRW, whereas individuals net sold 1.9183 trillion KRW.

The weakening of the US dollar is cited as a background for the inflow of foreign funds. On October 11, the won-dollar exchange rate in the Seoul foreign exchange market closed at 1,110.0 won, down 5.1 won from the previous trading day. This was the lowest level in about two years since December 4, 2018 (1,105.3 won). Although it slightly recovered to 1,115.6 won on October 13, it still remains in the 1,110 won range. The 12-month maximum drawdown (MDD) of the won-dollar exchange rate was about -12% (won appreciation), marking the fourth time since 2000. In all previous three cases, the stock market rose when the exchange rate further declined, suggesting a high possibility of a mid- to long-term rise in the KOSPI as well.

However, it is pointed out that the dollar weakness alone is not the sole reason for the inflow of foreign funds. KB Securities researcher Hainhwan Ha said, "Foreign funds began to flow in only after the won-dollar exchange rate fell significantly in 2020, and if one expects foreign funds to flow in solely because of the dollar weakness, then if the won-dollar exchange rate remains at the current level, additional foreign fund inflows should not be expected. This is a blind spot." He added, "Despite the won-dollar exchange rate hovering in the low 1,110 won range over the past week, foreign fund inflows continued, so it is necessary to identify other variables."

KB Securities emphasized the need to pay attention to the trend of new COVID-19 cases in emerging countries. They explained that the timing when foreign funds switched to net buying aligns more closely with the trend of new COVID-19 cases rather than the won-dollar exchange rate. Researcher Ha said, "The increase in new COVID-19 cases in countries included in the Morgan Stanley Capital International (MSCI) Emerging Markets (EM) index began to slow down since mid-September, which coincides with the timing of the foreign net buying turnaround. If COVID-19 is the most critical variable in the current macroeconomic environment, the relative attractiveness of emerging markets, where new case growth is slowing, is higher."

In the environment of dollar weakness, attention should also be paid to individual investor demand going forward. This is because individual investors, who have made record overseas stock investments, may turn their interest back to the domestic market. Researcher Ha said, "Due to the slowdown in the momentum of the US stock market and the real decline in returns caused by the falling won-dollar exchange rate, individual investors who invested in overseas stocks will face deeper concerns." He explained, "Until August, the US stock market’s S&P 500 and Nasdaq showed higher gains than the KOSPI, but since September, the KOSPI has outperformed, and considering the exchange rate, the actual difference is even greater." He added, "The size of foreign currency custody securities provided by the Korea Securities Depository has maintained an increasing trend this year but was almost the same as the previous month in September. If it turns to a decline after October, the possibility of individual funds returning to the domestic stock market may increase."

This content was produced with the assistance of AI translation services.