Author: Zhang Yaqi, Wall Street News
A substantial turning point is emerging in the capital flows for the Korean stock market. Foreign investors' net buying in a single day has hit a historical record, selling pressure from domestic institutions has significantly eased, and regulators tightening access to leveraged ETFs—all these factors point towards a marginal improvement in KOSPI market volatility.
On July 31, foreign investors net bought approximately 7.2 trillion KRW worth of KOSPI stocks in a single day, setting a new all-time high for daily net buying. According to Wind Trading Platform, a report by Citi Research analyst Jin-Wook Kim stated that this figure marks a fundamental reversal of the large-scale net outflow trend by foreign capital that persisted for several months prior. Citi Research currently maintains its KOSPI target at 10,000 points and believes that headwinds from capital flows are further subsiding.
In terms of market impact, the monthly net selling by foreign investors narrowed significantly to 9.8 trillion KRW in July, compared to net selling of 48.4 trillion and 44.5 trillion KRW in June and May, respectively. Meanwhile, domestic pension funds and mutual funds turned net buyers of KOSPI stocks in July, purchasing 1.0 trillion KRW, after net selling 2.2 trillion and 2.4 trillion KRW in May and June, respectively. Citi believes the headwinds for Korean stocks from fund flows have clearly weakened, while tailwinds from fundamentals and policy are gathering strength.
The scale of foreign capital's return is unprecedented in historical data. The net buying of 7.2 trillion KRW on July 31 alone far exceeds any previous single-day record, marking a significant shift in foreign investors' attitude towards the KOSPI.
According to the Citi Research report, the recent adjustment in the KOSPI was mainly driven by foreign investors' rebalancing operations and profit-taking. However, since mid-July, the pace of capital inflows into the KOSPI market and overseas KOSPI-related passive ETFs has noticeably accelerated, a trend that further strengthened towards the end of the month.
Looking at monthly data, the net selling by foreign investors narrowed to 9.8 trillion KRW in July, a significant decrease compared to previous months—net selling in June and May reached 48.4 trillion and 44.5 trillion KRW, respectively. This narrowing indicates that the foreign selling pressure, which previously dominated the market downturn, has greatly eased, and the momentum for bargain-hunting is building.
The Financial Services Commission (FSC) officially tightened access for retail investors to single-stock leveraged ETFs starting July 31, a new regulation expected to dampen overall volatility in the KOSPI market.
Specifically, the minimum margin requirement for retail investors to participate in single-stock leveraged ETFs has been significantly raised from the previous 10 million KRW (a mix of stocks and cash) to 30 million KRW (cash only). The market effect was immediate after the new rule took effect—according to a Yonhap News Agency report on July 31, the trading volume of major single-stock leveraged ETFs has dropped to about 50% of the monthly average. Meanwhile, the market capitalization of 16 single-stock leveraged ETFs has also shrunk noticeably.
Citi believes that reduced retail participation in high-volatility instruments will help smooth short-term fluctuations in the KOSPI market, providing a more stable operating environment.
The market previously had concerns about potential selling pressure from rebalancing by the National Pension Service (NPS) of Korea, but actual data for July shows that institutional funds have quietly shifted direction.
Korean pension funds and mutual funds collectively net bought 1.0 trillion KRW worth of KOSPI stocks in July, in stark contrast to net selling of 2.2 trillion KRW in May and 2.4 trillion KRW in June. Citi Research points out that when the KOSPI was around 6,500 points, the NPS's domestic equity allocation ratio had fallen to 24.2%, lower than 29.4% in May.
Citi believes that, considering the potential public backlash if the NPS significantly reduces its domestic stock holdings, the NPS is likely to maintain an overweight position in domestic equities for a considerable period, with its domestic equity allocation ceiling potentially reaching 28.8% or even higher. Furthermore, Citi expects that if the KOSPI can rise to the 9,000-10,000 point range this year, the NPS may gradually resume rebalancing operations for Korean stocks.
Against the backdrop of multiple positive signals, Citi Research maintains its year-end KOSPI target of 10,000 points and lists several tailwind factors supporting this target.
Citi believes that solid fundamentals in the memory chip sector, combined with the KOSPI's current historically low valuations, form the core support for the market. Meanwhile, Korea's strong economic fundamentals and favorable policy mix are creating new upward momentum.
Notably, Citi also points out that if needed by market conditions, Korean financial authorities have the potential to provide liquidity support, including intervention tools such as establishing a stock market stabilization fund, which offers a degree of policy floor support for the market. Citi believes that as headwinds from fund flows continue to subside, the combined force of the aforementioned fundamental and policy factors will become increasingly apparent.
