Kospi underwhelms as foreign, domestic investors explore greener pastures abroad

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Kospi underwhelms as foreign, domestic investors explore greener pastures abroad

Published: 24 Nov. 2024, 07:00

SHIN HA-NEE
[email protected]

Audio report: written by reporters, read by AI

[GETTY]

Foreign investors are pulling out of the Korean stock market, while domestic investors pour record amounts of money into securities overseas. The country’s benchmark index continues to languish, with share prices hovering well below their book value.

Such a trend is summed up in a self-taunting quip that has been making rounds among Korean investors for the past few years: “The smarter you are, the faster you will cash out of the domestic market.”

“Regardless of short-term fluctuations, blue chips in the United States have been proven to increase in value eventually,” said a Seoul-based, 25-year-old retail investor, who wished to be identified by her surname Shin.

For the domestic stock market, on the other hand, Shin is not as confident in its long-term prospect compared to the U.S. indices — hence the reason that she has invested primarily in exchange-traded funds and stocks in the U.S. market, such as Invesco QQQ Trust and Apple since 2021.

Shin is one of many who opted to bag U.S. stocks while moving away from the domestic market.

The outstanding amount of Korea’s investment abroad reached a record of $2.51 trillion in the third quarter, up $118.3 billion from the preceding three-month period, according to the Bank of Korea’s preliminary international investment position issued on Thursday.

Of those, the outstanding amount of securities investments by Korean residents rose $64.6 billion to $996.9 billion, also a new high. An increasing amount of investments flowing into U.S. securities, as well as a recent U.S. stock market rally and the strong dollar, drove the growth.

In contrast, liabilities, meaning foreign investment in Korea, inched down $1.1 billion to $1.54 trillion, with securities investments down $26.7 billion to $957.5 billion.

This is the first time Korea’s investments in foreign securities have surpassed foreign investments in Korean securities.

Foreign investors, which drove the stock prices earlier this year with a robust buying spree, have turned net sellers of Korean stocks since August. They net sold shares worth 2.87 trillion won ($2.05 billion) in August, 7.92 trillion won in September, 3.84 trillion won in October and 2.44 trillion won through the first 20 days of this month, according to the Korea Exchange.

The outflow of foreign capital has weighed heavily on the country’s stock market. The Kospi’s price-to-book (P/B) ratio — calculated by dividing total market capitalization by listed companies’ book value of equities — fell below 1 in August, which indicates an undervaluation, and came at 0.87 as of Thursday.

The P/B ratio of Japan’s Nikkei 225 stood at 1.41, China's CSI 300 at 1.31, and the S&P 500 at 5.23.

Korea was also one of the hardest hit by the post-election market volatility as the export-driven nature of its economy made the country more vulnerable to external uncertainties regarding the incoming Donald Trump administration’s tariff policies.

A screen in Hana Bank's trading room in central Seoul shows the Kospi dipping below the 2,400 threshold for the first time since August on Nov. 15. [NEWS1]

While the Kospi has gradually recovered after a steep drop, investors’ skepticism toward the long-term prospects of the domestic stock market persists, especially with Samsung Electronics struggling to quell concerns surrounding its waning market competence.

“Investor concerns that Trump’s tariff proposals may hit Korea and China harder than others have been the primary reason [for a steeper market fall compared to others], and discussions of a looming crisis in Samsung Electronics, with the company failing to benefit from the boon in the global chip sector, also played a part,” noted Park Sang-hyun, chief economist at iM Investment & Securities.

With the government’s efforts to boost the sluggish stock prices yet to bear fruition and the potential growth rate facing a slowdown, Korea needs a more fundamental shift in its economic and industrial structure to secure a breakthrough, analysts argue.

In a report released on Nov. 18, Eugene Investment & Securities analyst Huh Jae-hwan cited the high volatility of corporate earnings performance, partly caused by its high reliance on manufacturing and tax rules that incentivize companies to undermine shareholder value.

“For the Korean stock market to progress forward, the country needs to bolster the local service sector that can mitigate export volatility and foster the startup and venture capital market for innovation,” said Huh.

“Fundamentally, enhancing the competitiveness of the domestic companies would be an inevitable solution, possibly with our own economic policies to prioritize and protect the domestic industry,” Park also suggested.

The chief economist also pointed at the weak domestic demand for the sluggish stock market, saying, “A recovery in domestic demand will be crucial to be able to better defend ourselves against the impact of tariff increases and others to come.”

BY SHIN HA-NEE [[email protected]]