Due to Middle East instability... Foreign investors' domestic stock funds see net outflow for two consecutive months

Foreign investors' domestic stock funds have experienced net outflows for the second consecutive month due to uncertainties about the growth potential of the global artificial intelligence (AI) industry and geopolitical instability in the Middle East.

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According to the "International Financial and Foreign Exchange Market Trends since September" report released by the Bank of Korea on the 10th, foreign investors' domestic stock investment funds saw a net outflow of $5.57 billion in September. This is the largest amount since May 2021 (-$8.23 billion).

Based on the won-dollar exchange rate at the end of last month (1,307.8 won), this amounts to approximately 7.28 trillion won. Foreign investors' domestic stock investment funds have continued net outflows for two consecutive months since August (-$1.85 billion).

A Bank of Korea official explained, "The net outflow was due to uncertainties about the growth potential of the global AI industry and geopolitical instability in the Middle East."

On the other hand, foreign investors' bond investment funds recorded a net inflow of $3.04 billion. This is a decrease compared to last month ($5.47 billion). The net inflow is interpreted as continuing due to increased incentives for short-term arbitrage amid volatility in international financial markets and sustained demand for medium- to long-term bonds.

Foreign investors' bond investment funds have maintained net inflows for six consecutive months since April, when there was a net inflow of $2.12 billion.

Including both stocks and bonds, foreign investors' domestic securities investment funds turned to net outflows for the first time in 11 months. Although bond funds continued to see net inflows, the scale of net outflows in stock funds expanded significantly. Securities investment funds experienced net outflows for the first time in 11 months since October last year (-$2.78 billion).

The won-dollar exchange rate fell sharply from 1,336.0 won at the end of August to 1,307.8 won at the end of September, a decrease of 28.2 won. However, as of the 7th of this month, it rose again to 1,346.7 won.

The Bank of Korea explained, "The won-dollar exchange rate fell amid a shift in the U.S. Federal Reserve's policy stance, yuan appreciation, and quarter-end dollar sales by exporters, but then reversed to an increase due to concerns over escalation in the Middle East and unexpectedly strong U.S. employment data in September."

The volatility of the won-dollar exchange rate slightly decreased compared to the previous month. The daily fluctuation of the won-dollar exchange rate in September was 4.8 won, down from 5.8 won in August. The volatility rate was 0.36%, lower than August's 0.43%.

The credit default swap (CDS) premium on South Korean government bonds (based on the 5-year Foreign Exchange Stabilization Fund bonds) averaged 32 basis points (1 bp = 0.01 percentage points) last month, down 3 basis points from 35 bp the previous month.

CDS are financial derivatives that act as insurance to compensate for losses if the issuing country or company defaults. When the economic risk of the country increases, the premium generally rises as well.

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