Korean stock market hit by foreign investor exodus

Market braces for short-term shock of foreign selling and high exchange rate

Foreign investors are orchestrating a string of sell-offs on the Korean stock market, triggered by the rising won-dollar exchange rate. Market analysts forecast such economic volatility to continue for some time.

According to the Korea Exchange, foreign investors shifted to net selling for three consecutive days beginning on Monday, offloading stocks valued at a total of 950.6 billion won ($685 million).

This marks a notable departure from their net purchasing stance shown in February and March, which was bolstered by the government’s Corporate Value-up Program. Even after the April 10 general elections, during which the ruling People Power Party suffered a crushing defeat, foreign investors continued their buying spree, snapping up over 1 trillion won worth of stocks in the domestic market on April 11.

Market analysts attribute the foreign investor exodus to the sharp depreciation of the won, spurred by an Israeli airstrike targeting Iran. This incident bolstered investor preference for the dollar, widely regarded as a safe-haven asset.

Amid escalating concerns about conflicts in the Middle East, the won-dollar exchange rate briefly surpassed the 1,400-won mark during Tuesday’s trading.

Forecasts suggesting that the United States will delay cutting interest rates also intensified the situation.

Typically, a rise in exchange rates triggers foreign selling in the domestic market. This occurs because foreign investors, who convert dollars into won for investments, face exchange losses when the won weakens.

However, even though the exchange rate declined and settled at 1,386.8 won on Wednesday, there has been no surge observed in foreign selling.

Korea’s benchmark KOSPI initially surged in the morning, only to reverse course and finish at 2,584.18, down 25.45 points from the previous day.

There is a high likelihood of a further depreciation of the won, especially with dividend payments by listed companies scheduled to commence this month. Approximately 9.2 trillion won in dividends will be distributed to foreign shareholders in April alone.

Although the amount is not significantly high compared to other years, the prevailing exchange rate conditions aggravate concerns. With the current level of exchange losses, foreign investors are likely to convert their dividends into the dollar rather than reinvest them in the Korean market. This could increase the demand for the dollar, further driving up the won-dollar exchange rate and potentially creating a vicious cycle of increased foreign sell-offs of domestic stocks.

Market analysts advise making preparations for potential shocks up to a specified level in the short term.

Na Jung-hwan, an NH Investment & Securities analyst, forecast that the KOSPI could fall to 2,510, a level previously seen during the stock market plunge in January.

Moon Da-woon, an analyst at Korea Investment & Securities, also estimated that the exchange rate could reach 1,440 won if the conflicts in the Middle East persist.

“The escalating geopolitical conflicts in the Middle East are heightening risk aversion, prompting the need to anticipate potential overshooting in the near future,” Moon said.

Overshooting refers to the shortterm volatile behavior observed following an economic shock.