What Are the KOSPI Beneficiaries of the 'China Run Paradox'?

[Image source=Yonhap News]

[Asia Economy Reporter Junho Hwang] Contrary to expectations that foreign investors would avoid the Korean stock market amid the ‘China Run (de-China)’ trend, they are driving the market up by engaging in ‘Buy Korea.’ Analysts suggest focusing on the potential improvement in foreign investor demand for stocks with relatively reduced foreign ownership ratios but high short-selling ratios.

According to the Korea Exchange on the 7th, since Chinese President Xi Jinping secured his third term on the 23rd of last month, foreign investors have net purchased 2.5323 trillion KRW in the KOSPI. This is over 1 trillion KRW more compared to the 1.3023 trillion KRW recorded during the same period before the 23rd. Except for one day on the 28th of last month, ahead of the U.S. Federal Open Market Committee meeting on the 3rd of this month, foreign investors have consistently recorded net purchases.

Even though the U.S. Federal Reserve (Fed) officials decided on the fourth giant step (a 75 basis point increase in the benchmark interest rate) this year, foreign investors only reduced the amount of net purchases in the domestic stock market without changing their overall direction. As of 9:31 a.m. on the same day, foreign investors were the only trading entity continuing net purchases in the KOSPI, with 13.3 billion KRW.

The securities industry has focused on the ‘paradox of the China Run.’ Hana Securities diagnosed that in a situation where economic indicators and earnings estimates remain unchanged, foreign investors’ net purchases and short covering seem related to recent portfolio changes within emerging market indices. According to Hana Securities, since the second half of this year, 2.8 billion USD has been withdrawn from MSCI (Morgan Stanley Capital International) Emerging Markets (EM) index-tracking exchange-traded funds (ETFs). In contrast, the MSCI Ex China EM index, excluding China, has seen a net inflow of 100 billion USD.

Researcher Sanghyun Park of Hi Investment & Securities also analyzed, "Although the exact intention behind foreign investors’ net purchases of domestic stocks is unknown, it signals that global funds are beginning to see positives over negatives, or that funds fleeing in anticipation of a directional shift in the Chinese financial market are flowing into the domestic stock market, creating the ‘paradox of the China Run.’"

Stocks that can be considered beneficiaries of the ‘China Run’ are those included in the MSCI EM index, have recently seen a relatively reduced foreign ownership ratio, and have relatively high short-selling balance ratios. Hana Securities identified such stocks as Samsung Electronics, NAVER, Kakao, EcoPro BM, KakaoBank, Samsung Electro-Mechanics, NCSoft, and LG Innotek.

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