Korean retail investors in US stocks suffer as won strengthens

Hong, a woman in her 30s living in Seoul, is having second thoughts about her U.S. stock investments.

"I increased the share of U.S. stocks in my portfolio about two months ago because the Korean market was doing poorly. But the stronger won has left my returns below expectations. I'm not sure whether to sell or just hold the stocks for the long term," she said.

Hong is not alone. The won's recent strengthening against the dollar has cut returns for many Korean retail investors holding U.S. stocks, as currency losses offset stock gains.

The won-dollar exchange rate closed at 1,339.2 won per dollar on Thursday, down sharply from the 1,550-won range seen two months ago after several weeks of declines.

The won's strengthening can significantly reduce returns even when U.S. stocks rise. For example, a 20 percent gain on a U.S. stock would translate into a return of only about 4 percent for a Korean investor if the won-dollar exchange rate falls by around 14 percent.

The recent currency move has led some investors to consider selling their U.S. stocks as the won continues to strengthen.

However, some investors are using the stronger won as an opportunity to increase their exposure to American stocks. The stronger won has lowered the cost of buying U.S. assets in won terms, making it easier for Korean investors to enter the U.S. market.

This has helped drive money into Korean-listed exchange-traded funds (ETFs) tracking major U.S. indexes.

Investors made net purchases of 951.6 billion won ($711 million) in the TIGER U.S. S&P 500 ETF over the past month, according to ETF Check, a platform operated by Korea Securities Computer Corp. The TIGER U.S. Nasdaq 100 and KODEX U.S. Nasdaq 100 ETFs attracted net purchases of 589 billion won and 299.5 billion won, respectively.

The focus is now on how long this trend can continue and how much further the won can strengthen, with some analysts seeing signs that its recent rally is losing steam.

One factor behind the won's recent gains was SK hynix's conversion of dollar proceeds from its July American depositary receipts issuance into won. Much of the conversion is believed to have been completed, meaning the resulting boost to dollar supply could fade.

At the same time, the first phase of Korea's planned $350 billion investment in the United States could put upward pressure on the won-dollar exchange rate. The government is expected to announce initial investment plans in the coming days covering nuclear power and natural gas projects.

Authorities have said that investments will be financed with returns from its foreign exchange reserves, limiting their impact on the currency market. But the scale of the investments could still affect market sentiment.

Kim Yu-mi, an analyst at Kiwoom Securities, expects the exchange rate to rebound to the low 1,400-won range in the fourth quarter.

"While the exchange rate could fall to the low 1,300-won range in the short term, further declines are likely to be limited. It could rebound to the low 1,400-won range toward year-end and seek a balance," she said.