Foreign Investors Return to Emerging Markets... Potential for Policy Shift

Third Largest Foreign Net Purchase in November This Year... Already the Largest Scale
Large Cap Stocks' Returns Rebound... Possible Foreign Investor Trend Reversal
Concentration on Cyclical Growth Stocks like IT and Automobile

[Asia Economy Reporter Minwoo Lee] Foreign capital inflows into the KOSPI market have turned to net buying for the first time in a month. Although it is difficult to definitively say this marks the start of a full-scale net buying trend, analysts note that since net buying has returned across emerging markets in general, attention should be paid to the possibility that a fundamental shift is beginning.

According to the Korea Exchange on the 20th, foreign investors have net bought a total of 1.5503 trillion KRW in the KOSPI market so far this month through the previous day. This contrasts with last month's net selling of 3.8731 trillion KRW. This marks the third month of net buying by foreigners this year. Notably, the scale of net buying is also remarkable. Even though it is only mid-month, the amount has already far exceeded the levels of April (385.7 billion KRW) and September (1.0934 trillion KRW).

Along with the shift to net buying by foreigners, changes are also emerging within the market. Until the 17th, the KOSPI's monthly returns were roughly flat, showing a decline for five consecutive months, but during the same period, large-cap stocks recorded flat returns, relatively holding up better. Seokhyun Park, head of investment strategy at KTB Investment & Securities, explained, "It has been 10 months since large-cap stock returns outperformed the index, last occurring in January," adding, "This is a representative market style change expressed alongside the shift to net buying by foreigners."

Of course, some caution that expecting a full-scale start of net buying by foreigners may be premature. The global COVID-19 situation could still worsen, and concerns about global inflation remain ongoing. Inflation instability directly affects central bank monetary policies, market interest rates, and the strength of the US dollar. Doubts about next year's corporate earnings forecasts are also emerging.

Nevertheless, this shift to net buying by foreigners is seen as a meaningful signal that could develop into a positive trend reversal. First, the return to net buying by foreigners has appeared this year for the first time not only in the domestic market but also across emerging Asian stock markets including Taiwan, India, and five Southeast Asian countries (Thailand, Indonesia, Malaysia, the Philippines, Vietnam). Park noted, "In April and September, when net buying by foreigners appeared in the KOSPI this year, such changes were not seen across emerging Asian markets," adding, "It is necessary to pay attention to the possibility that the November foreign investor trends in emerging Asia represent the start of a fundamental shift, as these movements are not limited to a few countries."

In particular, net buying by foreigners is recovering simultaneously in the South Korean and Taiwanese stock markets. So far this year through last month, foreigners have net sold about 45.3 billion USD (approximately 54 trillion KRW) across eight Asian countries (South Korea, Taiwan, India, and five Southeast Asian countries). Of this, net selling amounted to 28.7 billion USD and 19.4 billion USD in South Korea and Taiwan respectively. Park explained, "Despite the notable profit growth centered on IT this year, concerns about future earnings forecasts caused foreign investors to exit," adding, "The shift to net buying by foreigners in South Korea and Taiwan this month implies a shift in focus from earnings forecast concerns to anticipation of early reflection and price attractiveness."

Negative factors that caused global liquidity to avoid emerging stock markets have already been exposed, suggesting that foreign capital flows may have reached a turning point. The risk of a sharp rise in global inflation is expected to peak in the fourth quarter of this year, and concerns about accelerated changes in the US Federal Reserve's monetary policy are gradually easing. Ultimately, abundant global liquidity may once again turn its attention to risk assets.

Park advised, "Considering that the sectors strengthening net buying in the KOSPI this month are not seasonal defensive sectors but rather IT sectors overall such as semiconductors, IT home appliances, software, hardware, and displays, as well as cyclical growth stocks like automobiles, cosmetics and apparel, and transportation, it is necessary to reflect this in year-end portfolio strategies."

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