Foreign investors may have more Korean stocks to sell

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Foreign investors have been dumping Korean stocks at a record pace in recent months even as the benchmark KOSPI extends one of the strongest rallies in global equities. The selling may have further to run, analysts said Monday.

Foreign investors sold 157.3 trillion won ($102.5 billion) of shares on the KOSPI this year through July 3, according to the Korea Exchange. The selling persisted even as the index surged 91.9 percent over the same period, marking one of the strongest rallies in the market's history.

Retail investors took the other side of the trade, buying a net 104.8 trillion won of shares and providing support for the index.

Foreign investors' share of KOSPI holdings rose to 40.47 percent on July 3 from 36.65 percent on January 2, even as they continued to sell heavily. Gains in Samsung Electronics and SK hynix lifted the market value of foreign-owned shares, offsetting the impact of the outflows. The two chipmakers accounted for about 90 percent of foreign investors' total selling in the first half.

Analysts say global funds have room to further trim their exposure to Korea's semiconductor sector, given their still-elevated holdings. Global funds manage portfolios against target country allocations, reducing exposure when market gains push holdings above target. Those targets can also shift with the external environment.

KB Securities analyst Oh Jae-young said foreign ownership of the KOSPI has historically ranged between 29 and 45 percent, excluding the period after the collapse of Lehman Brothers. If the current ratio were to fall to 35 percent, that could imply about 260 trillion won in additional selling, he estimated.

"As the stock market rises, foreign investors' need for rebalancing is also expected to increase, likely sustaining their selling," Oh said. "The remaining potential selling volume is estimated to be even larger than the amount sold so far."

The outlook for semiconductors is expected to be a key driver of the pace of further foreign selling, analysts said. The focus will be less on headline quarterly earnings and more on whether companies can show sustainable long-term profit growth.

Investors are now watching Samsung Electronics' preliminary second-quarter earnings on Tuesday, the release of the U.S. Federal Open Market Committee minutes on Thursday and SK hynix's planned American depositary receipt listing on the Nasdaq on Friday.

"The semiconductor profit cycle is expected to continue," said Kim Jun-yeong, a market strategist at iM Securities. "But questions over whether hyperscalers will sustain their investment amid recent gains in memory chip prices are weighing on the market, capping the upside."

Foreign investors continued to buy selected stocks despite the broader sell-off. Through July 3, they net-purchased 2.2 trillion won worth of Samsung Electro-Mechanics, 1.7 trillion won of Doosan Enerbility and 1.5 trillion won of Celltrion.

"In a high-exchange-rate environment, earnings growth and stronger shareholder returns will be key to drawing foreign capital back into Korea," said Noh Dong-gil, an analyst at Shinhan Securities.