KOSPI in a Box Range as 'Pivot' Expectations Fade... Attention Turns to Where Foreign Capital Will Flow

[Asia Economy Reporter Lee Seon-ae] The domestic stock market, where expectations for a Federal Reserve (Fed) pivot (policy direction shift) have disappeared, is expected to find it difficult to break out of the current trading range for the time being. Although a sustained bullish market is unlikely, foreign capital continues to flow in, prompting many to advise a selective investment strategy focusing on stocks showing improved supply and demand due to this inflow.

According to the Korea Exchange on the 7th, foreigners have been continuously net buying in the domestic stock market recently. From the 31st of last month to the 4th, foreigners net purchased approximately KRW 1.4745 trillion worth of domestic stocks. They bought about KRW 1.4704 trillion in the KOSPI market and around KRW 10.2 billion in the KOSDAQ market. This expanded buying momentum follows a net purchase of about KRW 1.1 trillion in the last week of the previous month. Foreigners recorded a net buying surplus of KRW 2.4 trillion last month and have maintained a net buying streak for five consecutive weeks.

The background for the inflow of foreign capital is analyzed not only as a strategy to take advantage of low-price buying opportunities in the domestic market but also as funds diverted from the Greater China region to Korea. Shin Seung-jin, a researcher at Samsung Securities, said, "The recent net buying by foreigners in our market is interesting," adding, "There are various reasons, but the most reasonable interpretation is that funds withdrawn from the Greater China region are flowing into Korea."

Researcher Lee Jae-man of Hana Securities also cited the reduction in the proportion of Chinese companies as a reason. He explained, "Despite no significant improvements, foreign net buying and short covering seem related to portfolio changes within emerging market indices (reducing Chinese company weights) currently underway," adding, "From July to October 2022, foreigners net sold USD 10.8 billion in the Chinese stock market, but during the same period, foreigners net bought in India, Brazil, and the domestic market."

Accordingly, there is advice to pay attention to stocks expected to see improved foreign supply and demand going forward. The stock most purchased by foreigners last week was Samsung Electronics (KRW 448.1 billion). LG Energy Solution (KRW 257.7 billion) and Samsung SDI (KRW 231.1 billion) followed. Hanwha Solutions and LG Chem also made the list of top net purchases, with about KRW 60.5 billion and KRW 58.3 billion respectively.

Samsung Electronics was also cited as a stock likely to continue attracting foreign capital. Researcher Lee said, "It is necessary to focus on stocks benefiting from foreign supply and demand improvements based on portfolio changes within emerging market indices and seasonal reductions in short selling ratios," adding, "Among domestic companies included in the MSCI Emerging Markets (EM) index, those with a relatively large recent decrease in foreign ownership and relatively high short selling balance ratios can be considered companies with high potential for foreign supply and demand improvement in terms of stock price." Besides Samsung Electronics, this includes NAVER, Kakao, EcoPro BM, KakaoBank, Samsung Electronics, NCSoft, and LG Innotek.

The reason for this investment strategy is the forecast of limited fluctuations in the domestic stock market. The prevailing view is to be cautious about increased market volatility and to lower expectations. Kim Young-hwan, a researcher at NH Investment & Securities, noted, "Expectations for a pivot after the November Federal Open Market Committee (FOMC) have retreated," adding, "This seems similar to the situation after the September FOMC." The market, which showed a bear market rally on pivot expectations in July and August, experienced a correction after the September FOMC.

Kim further explained, "Considering that the October stock market rise was also based on expectations of a Fed policy shift, November is a time to pay attention to the possibility of increased volatility." He cited the establishment of a securities market stabilization fund as an upward factor and the retreat of pivot expectations and concerns over financial sector liquidity tightening as downward factors.

With downward factors dominating due to declining earnings forecasts for domestic companies in the second half, financial sector liquidity tightening, and growing recession signals such as trade deficits, the outlook is more negative. Labor Gil, a researcher at Shinhan Investment Corp., analyzed, "Korea's export growth rate is expected to remain negative throughout next year," adding, "Both liquidity and fundamentals are in a challenging situation."

Earnings expectations for domestic listed companies in the second half are also rapidly declining. According to financial information provider FnGuide, earnings estimates for companies listed on the KOSPI in the fourth quarter fell by 6.2% within a week. Park Seok-jung, a researcher at Shinhan Investment Corp., advised, "The coexistence of easing high inflation and a stable economy is unlikely, and tightening policies usually negatively impact the real economy with a lag of two to three quarters," adding, "We should prepare for further downward revisions of earnings estimates around the fourth-quarter earnings announcement season."

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