Overseas investments ride the China roller coaster

Koreans invested a total of $716.6 billion (roughly 780 trillion won) overseas last year, including retail and institutional investors, according to an estimate by the Bank of Korea. That’s the largest amount Korean investors have ever made abroad.

But overseas fund investments have been shrinking since hitting a peak of 56.7 trillion won in 2008 and were 16.3 trillion won last year.

But this year, 18.7 trillion won has been invested in overseas funds so far. What’s going on with the overseas fund investment market?

The reason overseas fund investments have so little interest to Korean investors is because of China. Korean overseas funds are heavily concentrated in China. On average, Chinese investments account for 35 percent of the total and in 2012 the figure was 48 percent.

“It’s rare that equity investments in a single country account for so much in an overseas fund, which can invest not only in equities and bonds around the world but also various raw materials,” said Hwang Yoon-ah, a reseacher for financial information provider Zeroin. “Even when considering how China is geographically close and the amount of investment information available, the concentration on China by funds is excessive.”

As a result, investment in overseas funds mirrors interest in the Chinese market. After November 2007, when Hong Kong’s Hang Seng Index rose to its highest point ever, Korean investments in overseas funds grew to their highest level. But when the Chinese market struggled after 2008, interest trailed off.

In 2007, a tax exemption on profits made on Korean stock investments was extended to overseas stocks. As a result, the overseas fund market in Korea, which was worth roughly 9.16 trillion won in 2006, surged to 51.7 trillion won the following year. In 2007, a bullish Chinese market encouraged Korean investors to climb on the bandwagon. On the last day of 2007, the Hong Kong stock market closed at 27,812.65, which was 39.3 percent higher than the end of 2006.

Even when excluding investments in China, the funds are heavily concentrated on emerging markets. Since 2003 investments in emerging markets accounted for 42 percent of overall overseas capital. When adding China to the equation, that ratio surges to 81.2 percent.

“Investments started to flock into overseas funds to make additional profit,” said Cho Sung-man, head of the global management team at Korea Investment Management.

In other words, Korean investors invested in overseas funds with any spare money they had after investing in safer assets such as real estate, bank deposits and bonds. They concentrated on emerging markets offering higher returns.

“When the local overseas’ fund market started to grow in the early and mid 2000s, the BRICs - Brazil, Russia, India and China - showed stronger growth than advanced economies,” said Chang Chun-ha, senior researcher at NH Investment and Securities. “It’s natural for money to be attracted to markets on the rise.”

But after reaching its peak in November 2007, the Hong Kong stock market tumbled. This gave the notion to Koreans that investing in overseas funds was dangerous. The speed with which Chinese fund investments shrank was gradual.

“As the loss that [Korean] investors suffered was so large and at such short notice, they weren’t able to withdraw their investments immediately,” said Cho of Korea Investment Management. “It was only after the Chinese market started to recover and their losses were somewhat recouped that they started to wind down their investments, which caused total investments in Chinese funds to downsize little by little.”

Also, before the global financial meltdown of late 2008, investing in overseas real estate funds was popular. Property prices overseas were surging.

“Korean investors put large parts of their wealth into real estate and for that reason they are less psychologically resistant to real estate funds including REITs (real estate investment trusts),” said Chang of NH Investment and Securities. But the global crisis quickly crushed real estate markets and Koreans fled funds invested in overseas real estate.

Since the global crisis, Korean investors have started to turn their interest to funds investing in bonds. “Bond prices went up when interest rates dropped as the U.S. Fed started quantitative easing,” said Shim Seung-ah, head of the Shinhan Investment Corporation’s fund department. “The reason global bonds were popular is because they had a higher profit return than Korean bonds.”

Investors who wanted a higher return than on funds investing in global bonds turned to global high-yield bond funds. These are funds investing in corporate bonds of advanced economies with a B-level credit rating.

Since 2013, funds investing in advanced economies have grown significantly. Those funds earlier only accounted for 2 to 3 percent of the total funds investing in overseas markets. In 2013, the figure grew to 5 percent and today it has expanded to 13 percent.

“As the advanced economies see a rapid recovery thanks to the aggressive quantitative easing policies, funds investing in advanced economies started to sell here in Korea,” said Suh Jin-hee, marketing executive at Fidelity. “It is the first time in Korea that management companies have profited from selling advanced economies funds.”

“The Insight Fund, which we started in 2007, at first was largely focused on investing in China but today 60 to 70 percent is in the United States,” said Lim Deuk-jin, an executive at Mirae Asset Management.

Among advanced economies, those investing in Europe have gained wide popularity. So far this year, 1.6 trillion won has poured into European funds.

That accounts for 66 percent of the funds investing in advanced economies, including North America and Japan.

BY JUNG SUN-EAN [lee.hojeong@joongang.co.kr]