Foreign investors turn to bonds over stocks

Last month, foreign investors continued to sell off their stocks in the Korean market, turning to bonds instead.

The amount of Korean bonds owned by foreigners hit an all-time record high.

In June, net sales of Korean stocks amounted to 715 billion won ($633 million), according to the Financial Supervisory Service (FSS) on Monday. Foreign investors in the main Kospi bourse sold a total of 1.2 trillion won worth of stocks while buying 500 billion won from the junior Kosdaq market.

Foreign investors have been net sellers since April.

On the other hand, foreign investors purchased a net 2.6 trillion won of bonds in the local market. They have been net buyers of Korean bonds since January this year.

Foreign investors continued to purchase Korean bonds despite U.S. key interest rates being 0.5 percentage points higher than Seoul’s. The U.S. Federal Reserve in June raised the benchmark rate to between 1.75 percent and 2 percent, outpacing Seoul’s 1.5 percent interest rate, and signaled that two more additional hikes could come within the year, which could bring the rate up to 2.5 percent. Despite this, foreign investors bought 7.79 trillion won worth of bonds and 5.73 trillion won worth of bonds matured in June.

Market experts say foreign investors have been increasing their bond holdings because they are considered a relatively safe asset. Stocks are more vulnerable to recent uncertainties created by the intensifying trade war between the United States and China and financial market instability resulting from emerging markets, including Argentina. On the contrary, Korea’s record-breaking current account balance, foreign reserves of over $400 billion and higher credit rating than Japan has led foreign investors to buy more Korean treasuries.

Korea’s credit default swap premium, an indicator of a nation’s sovereign risk, has remained low at 0.45 percentage points.

Last month, European and U.S. investors sold their stocks in the Korean market. Europeans sold 1.78 trillion won worth of stocks, while Americans sold 81 billion won. Asian investors, on the other hand, bought 1.77 trillion won worth of stocks. By country, British investors were the biggest net sellers, dumping 1.24 trillion won worth of stocks. Singaporeans were the biggest buyers, as they purchased 1.39 trillion won worth of stocks.

U.S. investors held the largest amount of stocks, valued at 249.3 trillion won, which accounts for 41.8 percent of all Korean stocks owned by foreigners. Europeans came in second with 173.6 trillion won, or 29.1 percent, and Asian investors held 71.8 trillion won, or 12 percent. Middle Eastern investors had 22.9 trillion won, or 3.8 percent.

Asian investors were the largest buyers of bonds, and purchased 1.19 trillion won. They were followed by Europeans with 909 billion won and Americans with 502 billion won. Foreigners net purchased 3.35 trillion won worth of treasuries overall.

As of June, foreign investors own 596.9 trillion won worth of Korean stocks, or 31.9 percent of stocks on the Kospi and Kosdaq. They own 110.6 trillion won in bonds, or 6.4 percent of the total.

This is the largest amount of bonds ever owned by foreign investors. Among the bonds, treasuries accounted for 79.9 percent, or 88 trillion won.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]