Foreigners Are Leaving, 'Fate Continues'... KOSPI Market Cap Share Hits Lowest in 6 Years

On the 10th, KOSPI opened at 2,660.86, up 38.46 points (1.47%) from the previous trading day, as dealers were working in the Hana Bank dealing room in Jung-gu, Seoul. On the same day, the won-dollar exchange rate started trading at 1,225 won, down 12 won from the previous trading day. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Lee Seon-ae] The pace of foreign investors exiting the Korean stock market is accelerating. Amid the 'selling' spree, the market capitalization ratio of KOSPI stocks held by foreigners has dropped to its lowest level in over six years.

According to the Korea Exchange on the 13th, as of the 11th, the total market capitalization of the KOSPI was 2,091 trillion won, of which the market capitalization of stocks held by foreigners was 666 trillion won. Based on market capitalization, the proportion of stocks held by foreigners is 31.86%. This is the lowest level in 6 years and 1 month since February 11, 2016, when it was 31.77%.

The foreign ownership ratio of KOSPI market capitalization was close to 40% in early 2020. Since then, due to the COVID-19 pandemic and the surge in individual stock investments, it decreased to 36.50% at the end of 2020 and 33.55% at the end of 2021. This year, it rose to 34.20% on January 25, ahead of the LG Energy Solution IPO, but then turned downward again. Since the 8th (31.95%), it has maintained the 31% range.

The reduction in the foreign ownership ratio is largely due to foreign selling of stocks. In particular, since mid-last month when the Ukraine crisis escalated to a critical point, the selling pressure intensified. In the KOSPI market, foreigners net sold 5.7532 trillion won over 14 trading days from February 18 to March 11. Except for two days (February 28 and March 3) during this period, 12 trading days were dominated by selling. Considering that foreigners net sold 1.4617 trillion won in January and showed a net buying of 2.313 trillion won until February 17, the recent scale of selling is remarkable.

The background for foreign selling is attributed to Russia's invasion of Ukraine and the resulting Western sanctions against Russia, which triggered risk-asset avoidance and the weakening of the Korean won. As preference for safe assets deepened, the dollar strengthened rapidly, and recently the KRW/USD exchange rate surpassed the 1,230 won level for the first time in 1 year and 9 months since May 2020. The sharp rise in the KRW/USD exchange rate acts as a negative factor for foreign demand, pulling down stock prices and leading to a vicious cycle that further drives up the exchange rate.

Jeon Gyu-yeon, a researcher at Hana Financial Investment, explained, "As preference for safe currencies increased, emerging market currency indices fell sharply, and Korea's 5-year credit default swap (CDS) premium rose from 21.6 basis points (1bp=0.01 percentage points) at the beginning of the year to 35.4bp." He added, "Domestic economic and supply-demand conditions are also unfavorable. Although Korea's trade balance turned to a surplus in February, considering the deficit scale of the previous two months, dollar liquidity is decreasing, and foreign selling of stocks is also a factor weakening the won."

The U.S. Federal Reserve's (Fed) announcement of interest rate hikes also burdens emerging market stock markets, including Korea. Interest rate hikes in developed countries encourage global capital to exit emerging markets.

Park Hee-chan, a researcher at Mirae Asset Securities, said, "Concerns about stagflation have increased due to the war and soaring oil prices, but there is little change in the Fed's interest rate hike outlook. The Fed, which maintained the view of temporary inflation last year and faced a credibility crisis, is now strongly signaling its determination to control inflation." He added, "While the possibility of Fed monetary tightening has not eased significantly, growing concerns about economic slowdown increase preference for safe assets and are likely to exert upward pressure on the dollar, a safe-haven asset."

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