A recent analysis suggests that the "capital offensive" from retail investors, which previously supported the South Korean stock market, is now losing steam. Consequently, foreign buying is emerging as the crucial factor determining whether the KOSPI index can stage a rebound. If geopolitical tensions in the Middle East ease and international oil prices along with long-term U.S. interest rates stabilize, overseas capital could flow back into South Korea's domestic market.
Kim Hak-kyun, head of the research center at Shinyoung Securities, stated during a press briefing held on the 22nd at the Korea Exchange in Yeouido, Seoul, that while retail investor funds offset foreign selling pressure in the first half of the year, it will be difficult for the market to rely on this source for a significant turning point going forward. "The intensity of foreign investors' buying will determine a market supply-demand landscape in the second half that is starkly different from the first half," he commented.
Calculating real fund flows by examining unsettled trades and margin loan data, Kim noted that in August, retail investors saw a net outflow of 1.35 trillion won (approximately $9.7 billion) from the South Korean stock market. As of the 18th of this month, cumulative retail outflows have reached 983 billion won (approximately $7.1 billion), with the average daily outflow volume already exceeding the level recorded in August.
Kim also highlighted a departure from past behavior: retail investors are now withdrawing funds immediately after market corrections. In previous instances, when the market peaked and corrected, retail investors typically used the opportunity to average down their costs and inject additional capital. This time, however, capital has continued to flow out even as share prices have declined. He attributes this exodus to the psychological shock caused by the sharp and short-term market correction on retail participants.
He identified the Middle East conflict, international oil prices, and long-term U.S. interest rates as the core variables that could reverse foreign buying behavior. Kim explained that if the conflict de-escalates, oil prices would stabilize, long-term U.S. Treasury yields would decline, and global capital would shift towards non-U.S. dollar assets. Both the easing of downward pressure on the Korean won and the fact that foreign investors have already significantly reduced their holdings of Korean stocks also enhance the possibility of an improved supply-demand balance in the coming months.
Kim emphasized that the market should focus on the long-term rates formed by market pricing, rather than on whether the Federal Reserve continues to raise its benchmark policy rate. He assessed that the recent rise in long-term U.S. bond yields is primarily due to the widening fiscal deficit and the surge in oil prices driven by the Middle East conflict, not economic overheating or built-in inflationary pressures. "The recent stock market rebound happened because oil prices and bond yields fell; the Fed is merely reacting passively. What's driving the market now isn't the Fed, it's the White House," he remarked. He predicted that the Middle East situation will dictate the direction of the South Korean stock market through its influence on oil prices, long-term bond yields, and foreign capital flows.
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