Foreigners Return After Two Months... Korean Stock Market Exodus Due to 'King Dollar'

[Image source=Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] Foreign investors, who led the 'bear market rally' last summer, are rapidly withdrawing from the Korean stock market in September. This is attributed to the high exchange rate and the strengthening global tightening stance, which have increased preference for the safe-haven asset, the US dollar.

According to the Korea Exchange on the 13th, foreign investors have net sold approximately 1.84 trillion KRW in the domestic stock market from the beginning of this month through the most recent trading day on the 8th. Foreign investors showed a selling dominance for six consecutive trading days this month, contrasting with their 'Buy Korea' stance in July and August.

Signs of foreign investors withdrawing from the domestic stock market due to the global tightening trend have been steadily observed since the beginning of this year. In fact, the proportion of foreign investors' market capitalization holdings in the KOSPI market was 32.76% at the end of January, decreasing steadily to 32.41% in February, 31.63% in March, and down to 30.45% in September. Notably, the scale of foreign capital outflow over six trading days in September matches the amount of 1.81 trillion KRW that foreign investors net purchased throughout July.

Foreign investors' selling pressure is analyzed to be linked with the 'strong dollar' trend. Typically, foreign investors tend to sell when the dollar strengthens, due to the release of stocks aimed at currency gains and a stronger preference for the safe-haven dollar. The KRW-USD exchange rate has shown strength this month, surpassing 1,388 KRW intraday for the first time in 13 years and 5 months since the financial crisis in April 2009.

Moreover, the global tightening trend is progressing faster than expected, as the Federal Open Market Committee (FOMC) meeting in September is expected to implement a giant step (0.75 percentage point hike). This is also seen as encouraging foreign investors to exit the domestic stock market. Following Federal Reserve Chairman Jerome Powell's strong message last week about continuing aggressive rate hikes, the federal funds futures on the Chicago Mercantile Exchange (CME) on the 12th (local time) priced in an 82% probability of a 0.75 percentage point rate hike at the September FOMC.

Shin Jungho, a researcher at Ebest Investment & Securities, analyzed, "The strong dollar phenomenon is triggering foreign investors' selling in the domestic stock market and stimulating trauma related to foreign exchange instability."

However, there is also analysis that the strong dollar trend may weaken somewhat around the release of the US August Consumer Price Index (CPI) scheduled for this week.

Kim Yumi, a researcher at Kiwoom Securities, said, "One of the factors driving inflation was energy prices, but with recent declines in oil prices and stabilization of energy prices, inflation may slow down. Accordingly, market expectations for the August US CPI inflation rate are converging around 8.1% year-on-year."

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