Barclays has indicated that the decision by South Korea's National Pension Service (NPS) to suspend portfolio rebalancing is amplifying volatility in the nation's stock market and placing increased pressure on the Korean won.
Economist Bum Ki Son from Barclays commented, "While the suspension of rebalancing has allowed the NPS and the KOSPI index to achieve higher returns, it has come at the cost of significantly elevated market volatility. Pension funds are traditionally viewed as stabilizers in financial markets. However, this adjustment to the NPS's operational rules has instead magnified market fluctuations."
Pension Fund Halts Rebalancing, Stock Volatility Rises
The NPS is South Korea's largest pension fund and the biggest shareholder in its domestic stock market. In January, the fund temporarily exempted itself from a rule requiring portfolio rebalancing when asset allocation deviates from preset targets. At the time, the NPS management committee warned that in an environment of significant market swings, continuing to adjust positions—particularly when domestic stock holdings exceed target ranges—could have a substantial negative impact on the local equity and foreign exchange markets.
Driven by enthusiasm for artificial intelligence and surging demand for memory chips, the South Korean stock market has soared. However, rising margin requirements and developments in the Iran conflict have triggered sharp market swings. After the benchmark KOSPI index surged 24% in January, setting a record for its largest monthly gain, investors paid a historically high premium to hedge against volatility. This record was subsequently broken in April with a 31% gain.
Market Swings Between Sharp Gains and Losses
As the KOSPI extended its rally, continuing to outperform major global indices, the NPS last month revised its domestic equity allocation target for the end of 2026 upward to 20.8% from the 14.9% announced in January, while lowering its overseas stock target to 34.7% from 37.2%.
Official data shows the fund achieved a 21.7% return on its domestic equity investments in the first quarter. As of March 31, its total assets under management reached 1,526.1 trillion won (approximately $1 trillion).
Son stated, "We conducted a scenario analysis, calculating that if the NPS had performed its rebalancing operations as usual, its return would have been only 11.1% by the end of May." He noted that despite the superior performance, portfolio volatility would have been much higher without rebalancing. He added that the suspension also increased KOSPI volatility "because the NPS did not sell during the market overheating in March and has not been buying during the market correction since June."
In response to Barclays' analysis, South Korea's Ministry of Health and Welfare, which oversees the NPS, stated, "The fund's management committee made the previous decision to enhance the fund's profitability and stability, while considering efforts to strengthen the fundamentals of the Korean capital market, including revisions to the Commercial Act." The ministry further said, "Barclays' report relies heavily on excessive assumptions and analysis of causality that has not been sufficiently verified."
Despite a pullback this month, the KOSPI is still up approximately 93% year-to-date, drawing greater attention to the issue of severe market turbulence. Earlier this week, the South Korean stock market swung wildly between sharp gains and losses, with a volatility indicator for the KOSPI 200 index hitting a record high.
Foreign Capital Flees, Won Under Significant Pressure
Son pointed out that while the NPS cited foreign exchange market pressure as one reason for suspending rebalancing, the decision has instead placed "significant pressure" on the forex market. He analyzed, "By suspending rebalancing, the NPS has effectively shifted the pressure of position adjustment onto foreign investors. The withdrawal of foreign capital from the Korean stock market has, in turn, generated massive demand for U.S. dollars, exacerbating currency market volatility."
So far this year, global funds have been net sellers of $78.7 billion worth of South Korean stocks. Analysts believe the primary reason for this outflow is that the sharp rise in major stocks like Samsung Electronics Co Ltd and SK Hynix Inc has caused foreign holdings to hit regulatory limits, forcing passive selling.
Won Hits Lowest Level Since 2009
Earlier this month, despite government pledges to curb excessive volatility, the Korean won fell to its weakest level since 2009, highlighting the pressure faced by some Asian currencies due to the Iran conflict and the resulting energy shock. This week, South Korean authorities announced plans to crack down on speculative foreign exchange trading, which helped spur a strong rebound in the won.
Son concluded, "Portfolio rebalancing operations are set to resume in July. Whether the NPS strictly adheres to the rules for position adjustments at that time will be a key factor influencing the won's trajectory. The institution has already signaled that rebalancing will be weaker due to a lowered daily rebalancing limit. This could exacerbate volatility in the Korean stock market and place greater pressure on the won."
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