Foreigners Withdraw Money from Stock Market... Largest Since Financial Crisis

Foreign Investors Withdraw $21.13 Billion from Domestic Stocks
US Early Tightening Begins
BOK: "Financial Market Volatility Increases... Pressure on Foreign Investment Outflows Rises"

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] Last year, the net outflow of foreign investment funds in domestic stocks reached the largest scale since the 2008 financial crisis. This means that the amount of funds taken out abroad was much greater than the investment in domestic stocks. Despite measures such as raising the domestic base interest rate, it is analyzed that the global tightening of liquidity and a preference for safe assets influenced this trend. There are also concerns that if the U.S. Federal Reserve's (Fed) early tightening intensifies, the outflow of foreign investment funds from the domestic stock market will increase further.

According to the Bank of Korea on the 12th, from January to November last year, the net outflow of foreign investment funds in domestic stocks amounted to $21.13 billion, marking the largest since 2008 (-$35.49 billion). Although the KOSPI index surpassed 3,000 at the beginning of last year, creating a 'bull market,' foreigners withdrew funds citing reasons such as profit-taking. In 2020, there was also a net outflow of $18.24 billion, showing the same trend for two consecutive years. This was also the first time in 13 years since 2007-2008.

A Bank of Korea official explained, "Last year, liquidity withdrawal movements shook the international financial market, strengthening the preference for safe assets," adding, "Concerns about U.S. inflation, the spread of the Delta variant, and instability in the Chinese stock market expanded the scale of foreign net outflows from the stock market."

Every time the U.S. made statements related to liquidity withdrawal, investment funds noticeably exited. When Fed Chair Jerome Powell expressed support for tapering (asset purchase reduction) within the year at the Jackson Hole annual symposium in August last year, $4.45 billion of investment funds were net withdrawn, and when the start of tapering was anticipated in October of the same year, $2.65 billion purely exited.

This trend is expected to strengthen further this year as the possibility of U.S. interest rate hikes increases. This is because emerging market funds are likely to flow into developed countries. The market already expects the Fed to raise interest rates more than four times this year. Goldman Sachs revised its forecast for U.S. interest rate hikes from three to four times annually.

In a recent Financial Stability Report, the Bank of Korea also expressed concern, stating, "If the normalization of monetary policies by major central banks accelerates more than expected, leading to increased volatility in international financial markets, the pressure for outflow of foreign securities investment funds could significantly rise."

Yoon Yeo-sam, a researcher at Meritz Securities, said, "South Korea preemptively raised its base interest rate in August last year, resulting in partial liquidity withdrawal," adding, "Although the volatility in value is relatively small, the trend needs to be monitored." He further noted, "If monetary policy tightening occurs in major countries, financial market instability may arise, causing the exchange rate to temporarily surge (overshooting)." However, there are also interpretations that these concerns are excessive. Lee Sang-won, deputy senior researcher at the International Finance Center, said, "South Korea's international financial market has grown significantly compared to 10 years ago," adding, "Countries seeking stability evaluate Korea as a good place to diversify funds, so there could even be inflows of some funds."

The won-dollar exchange rate has stabilized around 1,190 won after surpassing 1,200 won. On the day, the exchange rate started at 1,190.5 won, down 4.2 won, and formed the 1,189 won range in the early session. This is interpreted as partly due to the easing of market caution after Chair Powell mentioned that the timing of quantitative tightening would be at some point in the second half of the year.

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