Will Foreigners Return in April...Strong Dollar as a Variable

Dollar Strengthening Pressure Intensifies
Return Movement Optimistic but Early, Companies Show Solid Earnings
Valuation Burden Eases, Foreign Investors' Homecoming Expectations Rise

[Asia Economy Reporter Song Hwajeong] There is growing interest in whether foreign investors, who have rarely turned bullish, will switch to a buying trend in April. Foreign investors have shown a buying preference over the past five days, fueling such expectations. However, it is not easy to be optimistic as the pressure for a stronger dollar is likely to intensify in April.

According to the Korea Exchange on the 2nd, foreign investors net purchased 572.3 billion KRW on the first day of April in the KOSPI. They showed a buying preference by net purchasing on four out of the last five days. As of 9:15 a.m. that day, they had also net purchased 215 billion KRW.

Over the past five days, foreign investors net purchased SK Hynix shares worth 423.5 billion KRW, the largest amount, followed by Samsung Electronics with net purchases of 219 billion KRW. When foreign investors sell off in the domestic stock market, they mostly sell Samsung Electronics the most, so the recent net buying of Samsung Electronics is a sign of growing expectations for their return.

However, it is too early to be optimistic about the return of foreign investors. One of the main reasons for foreign investor outflows has been the pressure of a strong dollar, which is expected to become even stronger in April. Researcher Na Jonghyuk of Hana Financial Investment said, "Recently, strong orders from domestic heavy industries have put upward pressure on the Korean won, but every April, there is a surge in foreign investors’ demand for dividend remittances, tightening dollar supply and demand," adding, "Since the scale of foreign dividend payments is expected to expand again this year, dollar demand will increase, potentially raising volatility."

The increase in imports is also expected to strengthen the dollar. Last month, exports showed strong performance, recording the highest March export amount ever, and as exports do well, imports also increase, gradually reducing the trade surplus. Researcher Na analyzed, "From the current account perspective, foreign dividend payments worsen the primary income balance, and to offset this, the surplus in the goods balance is important," adding, "March Korea’s export growth rate was 16.6%, and it is likely to maintain double-digit growth through the second quarter, which is positive, but since import growth has exceeded export growth since February, the surplus in the goods balance will be limited."

Researcher Ahn Youngjin of SK Securities said, "In April, there is a seasonal surge in the demand for dividend remittances paid to foreigners, so a current account deficit can be expected again this year, as last year," adding, "This is why the won-dollar exchange rate is expected to rise from the current 1,130 KRW."

On the other hand, solid corporate earnings and the resulting easing of valuation burdens are factors that increase the possibility of foreign investors returning. According to Shinhan Financial Investment, based on the Morgan Stanley Capital International (MSCI) index, Korea’s stock market’s 12-month forward earnings per share (EPS) growth rate from the beginning of the year is 9.1%, with the pace of profit improvement comparable to or higher than emerging markets as well as the U.S. and U.K., where vaccination rates are high and economic reopening expectations are strong.

Valuation burdens are also easing. Researcher Kim Dami of Shinhan Financial Investment analyzed, "During 2016-2017, when foreign funds massively flowed into the domestic stock market, corporate earnings improved and the relative price-to-earnings ratio (PER) compared to global markets declined, making prices attractive," adding, "Although Korea’s stock market saw a sharp short-term rise in PER despite solid earnings growth early this year, the 12-month forward PER fell by 13.1% from this year’s peak due to the March market correction, easing valuation pressures."

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