Public funds jump ship as Kospi starts to flounder

The electronic board at KEB Hana Bank in central Seoul on Friday shows the Kospi barely hanging on to the 2,000 mark as it closed at its lowest since Jan. 2 2017. [YONHAP]

Foreign investors have been the driving force behind the recent bearish rally that has hit benchmark Kospi over the last week, with the index falling to its lowest point in nearly two years.

But foreign investors aren’t solely to blame. Pension funds, including Korea’s largest institutional investor, the National Pension Service, have also been busy selling stocks on the Korean market.

On Friday the Kospi closed barely above the 2,000 mark, at 2,027.15, after losing an additional 36.15 points, or 1.75 percent. This was the lowest close since Jan. 2 last year, when it fell to 2,026.16.

Friday’s market fall was led by foreign investors, who net sold more than 177 billion won ($155.5 million). Foreign investors have been dumping shares from the primary market for seven consecutive trading days. This month alone, foreign investors have net sold nearly 3.6 trillion worth of stocks on the Kospi, devaluating the Korean won to more than 1,140 won against the greenback.

This month alone, the Kospi has lost more than 311 points, or 13 percent. Compared to the beginning of the year, it has lost 459.2 points - an 18.5 percent drop.

The won has depreciated 2.8 percent against the greenback since the start of October, and since the beginning of the year it has devalued 7.4 percent.

Although pension funds net purchased 27.8 billion won worth of stocks on Friday on the Kospi, they have net sold 259.1 billion won worth of stocks this month alone. They have net purchased on only seven of the last 18 trading days.

Pension fund investors include not only the National Pension Service, but also other public funds such as the Government Employees Pension Service, the Military Personnel Pension and the Teachers Pension, as well as the Public Officials Benefit Association and the Korea Teachers’ Credit Union.

These funds traditionally protect the local stock market in times of crisis such as the global financial meltdown in 2008 and the European fiscal crisis in 2011. The pension funds generally shore up stocks when foreign and retail investors are busy selling off their shares in massive numbers.

In 2008, pension funds net purchased more than 9.7 trillion won worth of stocks from both the Kospi and Kosdaq, and in 2011 they net bought nearly 13.5 trillion won worth of stocks.

But this time the government funds were the first to jump ship, most likely because they have recently been criticized for their low investment performance.

As of July, the National Pension Service’s (NPS) overall investment yield is at 1 percent. Especially, the yield on its investments in the local stock market has suffered a 6.11 percent loss.

The recent offloading of shares seems to be an effort to minimize the losses that they are suffering from investing in the bearish market.

The pension fund operators have also recently been looking further afield for investment opportunities.

The NPS, which manages a 643-trillion-won fund as of July, announced this year that it will be reducing its stake in the Korean stock market, which as of July accounted for 19.1 percent, to around 15 percent by 2023.

Even the Public Official Benefit Association, which is the only pension fund that is making more than 10 percent on its investment yield, said it has cut back on investments in the Korean market.

“We invested more than 18 percent of our total assets in the Korean stock market last year,” said Han Gyeong-ho, CEO of the Public Official Benefit Association last week. “As of September this year, we have reduced it to 14 percent and plan to further lower it next year.”

Market analysts say there’s not much that the Korean government can do with the current bearish market.

“We’re looking into a contingency plan, but other than monitoring foreign investors’ investment trends, there’s not much that the government can do,” said a government official who requested anonymity.

The biggest reason is because the recent decline in the Korean stock market is largely due to outside risks - intensifying trade conflict between the U.S. and China, the normalization of the monetary policies of other countries due to the U.S. Fed’s interest rate hikes and instabilities in emerging markets - which are factors that the Korean government has little or no control over.

Some analysts are against the government intervening in the market, even if it is through the pension fund investors.

“In the past, the government has intervened in the market by buying stocks through the stabilization fund or banning short selling, but this has only resulted in negative side effects,” said Nam Gil-nam, a researcher at the Korea Capital Market Institute. “We’re at a time when it’s not appropriate for the government to actively play a role in stopping the declining stock market.”

Sung Tae-yoon, a Yonsei University economics professor, says that the current situation also reflects the weakness of Korean businesses that are easily affected by the slightest change in the global economy.

“The forecast that the Korean economy is shrinking and that Korean companies’ profitability will be worsening is reflected in the stock market along with the external factors,” said Sung. “The government has to start thinking about how to improve the Korean economy and the macroeconomic situation.”

BY LEE HO-JEONG, CHO HYUN-SOOK [lee.hojeong@joongang.co.kr]