Foreign investors dump Korean stocks, bonds amid rising US market rates

A trader works at a dealing room in Hana Bank's headquarters in Seoul, Friday. The main KOSPI index opened at 2,462.34, down 0.7 percent from the previous session, while the won-dollar rate rose by 9.70 to 1,348.20. Newsis

Foreign investors are pulling money out of the Korean market, as the prolonged high interest rates in the U.S. have widened the interest rate gap between the U.S. and Korea, making Korean stocks and bonds less attractive, according to analysts, Friday. This is the first time since November 2019 that foreign investors have been on a selling spree of both stocks and bonds.

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According to data from the Bank of Korea (BOK), the stocks and bonds market saw a net outflow of foreign investments totaling $1.43 billion in September. Foreign investors withdrew $1.33 billion from the stock market, a significant increase from the previous month's outflow of $910 million. The bond market saw a more modest outflow of $100 million, a decrease from the previous month's withdrawal of $790 million.

This month, the net-selling trend by foreigners has continued to accelerate. According to the Korea Exchange, foreign investors have sold off 1.25 trillion won from the benchmark KOSPI from Oct. 1 to Friday. This marks 13 consecutive days of net selling by foreign investors.

The central bank explained the outflow of foreign capital has largely been driven by concerns over China's economic deceleration and delays in the recovery of the semiconductor industry.

Even so, there is a market consensus that Korea is becoming less attractive to foreign investors. The rising won-dollar exchange rate, driven by concerns over sustained high interest rates, appears to have negatively impacted foreign investor sentiment. This has been further exacerbated by the ongoing conflict between Israel and Hamas, leading them to gravitate toward safe-haven assets.

One pressing concern is that the withdrawals might amplify the rise of the won-dollar exchange rate. While increasing the policy rate might be a solution for the BOK to counter the Korean won depreciation, it's a complex decision given the high level of household debt and the economic recession.

On Friday, the won-dollar exchange rate closed at 1,350.0 won per dollar, bouncing back after a modest decline over five consecutive trading days. In October, however, the rate of increase has become more moderate than in September. According to the BOK, the average won-dollar exchange rate in September rose by 28 won compared to August, reaching 1,349.3 won.

Still, market watchers anticipate the intense selling trend by foreign investors will soon stabilize.

"Since mid-September, foreign investors have consistently been net sellers in the KOSPI market each day. Yet, the volume of futures sales isn't alarmingly high, and it suggests the peak of fear sentiment in the market has been surpassed. Given this, the uncertainties that have been plaguing the stock market, including bond yields and unclear monetary policies, are likely to diminish," said Kim Jung-yoon, a strategist at Daishin Securities.

Amid concerns that the recent sharp rise of the U.S. treasury yields could dampen the global economy, officials from the U.S. Federal Reserve have been issuing dovish statements ahead of next month's committee meeting. There's also a prevailing belief that while the Israel-Hamas conflict might prompt a surge in oil prices, its long-term impact on the stock market will be minimal.

"If the won-dollar exchange rate faces further downward pressure, we might expect a shift towards net buying by foreign investors in the spot market," Kim said.