Will foreign buying continue to power KOSPI rally?

An electronic board in the trading room of a Hana Bank branch in Seoul shows KOSPI closed at 3,175.77 points Friday, down 7.46 points from the previous session. Yonhap

The growth of Korea's stock market capitalization above 3,000 trillion won ($2.1 trillion) is expected to continue, buoyed by strong foreign buying, market watchers said Friday.

Fueling the optimism is President Lee Jae Myung’s pro-market drive including the push for a "KOSPI 5,000 era."

According to Financial Supervisory Service (FSS) data, foreign investors net purchased over 3 trillion won in Korean equities in June, higher than the net purchase of 2.01 trillion won in May.

The two months of consecutive inflow is a significant turnaround from the previous nine months leading up to April, when foreign investors sold off nearly 3.9 trillion won in Korean stocks. Observers see the reversal as a signal foreign capital is returning to the Korean market.

The foreign selloff began late last year, after then U.S. presidential candidate Donald Trump emerged as the election frontrunner, fanning fears that Korea could be caught in the crossfire between the U.S. and China if Trump were to win the presidency.

The selloff gained further momentum in December last year after former President Yoon Suk Yeol's short-lived martial law declaration.

The market sentiment took a rapid dive, with the Korean currency crashing to nearly 1,500 won against the U.S. dollar.

However, investor sentiment picked up after Korea's June 3 presidential election.

IBK Investment & Securities analyst Byun Jun-ho said foreigners own about 30 percent of KOSPI-listed stocks as of July.

“Foreigners are unlikely to dump Korean shares, unless we see a sudden, sharp dollar appreciation or a major unforeseen shock,” he said.

Korean retail investors also increased their holdings of stocks to 67 trillion won over the past three months, up from 51 trillion won.

Hana Securities analyst Lee Kyung-soo said in a report that expectations of strengthened shareholder return policies under the new Lee administration, as well as improved inter-Korean relations, easing political uncertainty and a stronger Korean currency will help the Korean market regain global investor interest.

“Much of the Trump administration–related trade risks have already been priced into the market,” the report said.

“Easing domestic political instability will help foreign investors regain confidence in the Korean market. Government stimulus to revive the economy as well as a stronger won, monetary easing and stock market-friendly policies will sustain the recent months of capital inflows.”

On Thursday, the KOSPI closed at 3,183.23, up 1.58 percent from the previous day.

This was the highest level since Sept. 7, 2021, when the benchmark hit 3,187.42 points.

Foreign investors net purchased 446.4 billion won, while institutional investors net bought 46.2 billion won.

On Friday, the KOSPI closed at 3,175.77 points, down 7.46 points, or 0.23 percent from the previous session.