South Korea’s stock market is showing a material turn in investor flows. On July 31, foreign investors posted net purchases of about KRW 7.2 trillion in KOSPI stocks, the largest single-day net buying figure on record. Wallstreetcn, citing a Citi Research report by analyst Jin-Wook Kim, said the move marked a fundamental reversal from the heavy foreign net outflows that had persisted for months. Citi kept its KOSPI target at 10,000 and said capital-flow headwinds are continuing to ease.
Foreign buying hit a record on July 31
The scale of the rebound was unusual in historical terms. Citi said the KRW 7.2 trillion in net buying on July 31 was well above any previous single-day figure and reflected a clear change in foreign investor positioning toward the KOSPI.
According to the report, the earlier correction in the KOSPI was driven mainly by foreign rebalancing and profit-taking. Since mid-July, however, inflows into the KOSPI market and overseas passive ETFs linked to the KOSPI have accelerated, with that trend strengthening further near the end of the month.
On a monthly basis, foreign net selling narrowed sharply to KRW 9.8 trillion in July, down from KRW 48.4 trillion in June and KRW 44.5 trillion in May. Citi said that contraction suggests the foreign selling pressure that had weighed on the market has eased substantially, while buy-the-dip demand has started to build.
Tighter rules on single-stock leveraged ETFs
South Korea’s Financial Services Commission, or FSC, tightened access for retail investors to single-stock leveraged ETFs from July 31. Under the new rule, the minimum margin requirement for retail participation was raised from KRW 10 million, previously counted as a mix of stocks and cash, to KRW 30 million in cash only.
The effect appeared quickly. Yonhap reported on July 31 that trading volume in major single-stock leveraged ETFs had fallen to about 50% of their monthly average after the rule took effect. The market value of 16 single-stock leveraged ETFs also shrank noticeably. Citi said lower retail participation in high-volatility products could help calm short-term swings in the KOSPI.
Pension and fund flows turned positive
The market had previously worried that potential rebalancing by South Korea’s National Pension Service, or NPS, could add selling pressure. July data pointed in a different direction. Domestic pension funds and mutual funds together recorded net buying of KRW 1.0 trillion in KOSPI stocks in July, compared with net selling of KRW 2.2 trillion in May and KRW 2.4 trillion in June.
Citi said that when the KOSPI was near 6,500, the NPS domestic equity allocation had fallen to 24.2%, below 29.4% in May. The bank said a large cut in domestic equity holdings could trigger a public backlash, making it more likely that the NPS will keep an overweight position in local stocks for an extended period. Citi added that the upper limit for domestic equity allocation could reach 28.8% or higher. If the KOSPI rises to the 9,000 to 10,000 range this year, the NPS may gradually resume rebalancing into Korean equities, the report said.
Citi keeps its 10,000 KOSPI target
Against that backdrop, Citi maintained its year-end KOSPI target of 10,000. The report cited solid fundamentals in the memory-chip industry, historically low KOSPI valuations, strong economic fundamentals in South Korea, and a supportive policy mix as key supports for the market.
Citi also said South Korean financial authorities could provide liquidity support if market conditions require it, including tools such as a stock market stabilization fund. In Citi’s view, as flow headwinds keep fading, the combined support from fundamentals and policy could become more visible.