"Korean Stock Market, Environment for Foreign Investors' Return is Being Created"

Among Asian stock markets, the Korean stock market has fallen excessively
Potential for rise due to energy price stabilization and year-end optimism

On the afternoon of the 22nd, when the KOSPI closed at 3006.16, down 0.04% from the previous trading day, dealers are conversing in the Hana Bank dealing room in Jung-gu, Seoul. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Recent external issues such as concerns over the bankruptcy of China's Evergrande Group and the sharp rise in raw material prices have led to an analysis that an environment is being created where foreign capital can return to the domestic stock market, which has been undergoing adjustments.

On the 24th, Heungkuk Securities evaluated that since the third quarter, the domestic stock market has been relatively more sluggish compared to other Asian markets. Over the past 15 weeks on a weekly basis, the KOSPI has plunged 10.5%, whereas major Asian markets such as India and Indonesia have surged more than 10%. Considering that the Chinese stock market, which has faced various regulatory issues and controversies like Evergrande, also rose slightly during the same period, the decline in the Korean stock market stands out.

Researcher Junho Byun of Heungkuk Securities explained, "While the continued strength of the dollar is a factor, there are comprehensive aspects including sensitivity to China-related controversies, negative impacts as a raw material importing country due to the sharp rise in raw material prices, and preemptive concerns over semiconductor industry slowdown," adding, "The selling pressure due to external macro issues was thoroughly centered on foreign investors."

Foreign investors appear to have positively considered the Indian stock market, which has emerged as an alternative production country to China since summer, and Indonesia, a raw material producing and holding country. Based on closing prices, the KOSPI has underperformed the Indian stock market by 24% and the Indonesian stock market by 21% over the past 15 weeks. Researcher Byun analyzed, "Considering that the relative returns of major countries over 15 weeks are roughly within ±20%, recent fundamental concerns have likely been significantly reflected in the domestic stock market."

The selling trend by foreign investors seems to have ended since mid-last week. This followed the release of the minutes from the September U.S. Federal Open Market Committee (FOMC), which hinted at tapering (reduction of asset purchases). Consequently, the formalization of tapering at the November FOMC was virtually confirmed, and the dollar's strength appears to be peaking.

In this situation, if expectations for energy price stabilization emerge, there is a forecast that foreign capital could begin to flow back in earnest. Researcher Byun stated, "Although the possibility of a short-term adjustment in the KOSPI remains due to ongoing concerns about rising energy prices, considering the excessive underperformance of the KOSPI within Asia, the likelihood of adjustment due to aggressive foreign selling is low," and added, "Rather, if expectations for energy price stabilization arise, there is a high possibility that foreign investors will adjust their Asian stock portfolios and capital will flow into the KOSPI."

The approaching year-end is also positive. Historically, the market rarely experiences sharp declines at year-end due to U.S. consumer expectations and optimism about the coming year. Since the financial crisis, the KOSPI has generally performed well at year-end, with no more than a 5% drop over the two months of November and December. Attention should also be paid to the fact that the U.S. Purchasing Managers' Index (PMI) is high while China's PMI is low, indicating that the PMI gap between the U.S. and China is at a historic low. If the PMI gap between the U.S. and China rebounds, concerns about the KOSPI being exposed to China-related risks could ease.

Researcher Byun emphasized, "China's PMI fell below 50 in September, marking a bottom since 2010, but three months after China's PMI dropped below 50, the KOSPI mostly rose with an average increase of 4.2%," and added, "We should keep open the possibility of foreign capital inflow into the KOSPI over the next 3 to 6 months."

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