Foreign Investors Took Profits Ahead of Kospi Slump, Selling $67.3 Billion of Stocks as Retail Traders Reeled

Foreign ownership of market cap falls to a five-month low

Foreigners net sold $67.3 billion of Kospi stocks in May and June

"Korean stocks give global capital little reason to stay"

Foreign investors' share of South Korea's stock market capitalization has fallen to its lowest level in five months. Foreign ownership climbed to a 21-year high during a semiconductor-led rally, but overseas investors then sold more than 93 trillion won ($67.3 billion) of local shares over two months. With the Kospi extending its slide to a seventh straight trading day, brokerages say foreigners are pulling money out of the market on distrust over shareholder returns.

According to EpicAI, an artificial intelligence-based investment information platform, foreign investors accounted for 38.65% of total market capitalization on the Kospi as of Oct. 13. That was the lowest since May 4, when the figure stood at 38.25%.

Foreign ownership reached 41.56% of domestic market capitalization on June 25, when the Kospi approached 9,000 and closed at 8,930.30. That was the highest level since Sept. 23, 2005, when it stood at 41.61%. Shares of heavyweight chipmakers including Samsung Electronics Co. and SK Hynix Inc. surged, pushing the market value of foreign-held stocks to a historically elevated level.

From that point, foreigners appear to have decided the Kospi had peaked and continued heavy net selling. Foreign investors were net sellers of 44.7147 trillion won ($32.3 billion) in May and 48.6248 trillion won ($35.1 billion) in June on the main board. In just two months, they dumped more than 93 trillion won ($67.3 billion) of domestic stocks. Their share of market capitalization stayed high because rising share prices lifted the value of their holdings, even as large-scale profit-taking was already underway.

Foreign investors continued selling Korean equities after that. From June 25 through Oct. 14, their share of market capitalization on the Kospi fell 2.91 percentage points over roughly three and a half months. That is why some market participants describe the move as a "Kospi exodus" among foreigners, whose ownership had once climbed well above 40%.

The market value of stocks held by foreign investors also shrank sharply. As of Oct. 14, their holdings were worth 1,924.7517 trillion won ($1.39 trillion), down 1,113.8954 trillion won ($802.1 billion) from 3,038.6471 trillion won ($2.19 trillion) on June 25. In a little more than three months, more than 1,100 trillion won in paper value evaporated from foreigners' Korean stock holdings. The decline is also clear at the company level. Foreign ownership of Samsung Electronics, the bellwether of the Korean market, has recently fallen into the 46% range. That marks the lowest level since 2008.

The Kospi has struggled to find a chance to rebound under the weight of foreign selling. The index closed at 5,554.22, down 454.59 points, or 7.57%, from the previous session. Both the point loss and percentage drop were the largest since July 28, when the benchmark fell 732.09 points, or 10.84%. From Oct. 6 through Oct. 15, the Kospi fell for seven straight trading days, tumbling a combined 1,449.52 points, or 21%.

Brokerages say a sustained rebound in Korean equities will be hard to expect unless foreign selling eases. Yang Hyun-kyung, an analyst at iM Securities, said net foreign selling narrowed from the previous day, but trading flows had not improved enough to sustain a rebound. Technically, it is also too early to judge whether the Kospi has found support after slipping back below 6,000, Yang added.

Hwang Su-wook, an analyst at Meritz Securities, said semiconductor fundamentals still appear solid, but stock prices are being driven more by investor sentiment and market flows than by fundamentals. With neither retail nor institutional investors setting a clear direction, he said, it is not too late to wait and assess the market's path after confirming whether foreign funds return on a sustained basis.

One brokerage executive said that from a foreign investor's perspective, the Korean stock market remains a risky market that investors should be ready to exit whenever trading flows break down after a sharp rally, no matter how strong semiconductor earnings are. From the standpoint of global capital, the Kospi offers little reason to keep money parked there because trust in shareholder returns and corporate governance remains weak, even when earnings are strong, and market volatility only adds to the concern.

Kang Kyung-ju, Hankyung.com reporter memory@hankyung.com