Will strong won attract return of foreign investors?

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By Anna J. Park

One of major topics in the current market would obviously be the strengthened won against the dollar.

The won-dollar exchange rate on Tuesday's FX market finished at 1,165.0, up 7.0 won from Monday's closing. This is a slight depreciation of the won against the dollar compared to Monday, yet the general trend of the won's recent rise in its value continues.

Earlier this week, the won-dollar exchange rate went down as low as 1,158 won per dollar on Monday's closing. It was the first time since January that the won-dollar exchange rate plummeted below the 1,160 won mark.

Behind the key reasons for the strengthened won are the weakened dollar due to the U.S. Federal Reserve's monetary policies, Korea's quite sound macroeconomics indices and also expectations on Korea's improved exports based on China's economic improvement, said experts.

“Given the Korean economy's relatively sound fundamentals amid COVID-19, the won's value should've already been appreciated, yet it remained within the range between 1,180 and 1,200 won due to the lack of momentum. The Chinese yuan's recent appreciation seems to have played a role as a much-needed momentum for the won's strengthening move,” Seo Jeong-hun, senior researcher at Hana Bank's FX derivatives department, said in a telephone interview.

Market experts pointed out the strengthened won could function as a boon for local stock markets, as foreign investors could gain profits from both direct investment and exchange rate gains.

“The weakened dollar and strengthened won could function as a driving force to keep the momentum of the KOSPI's upward trend alive,” said Lee Kyoung-min, analyst at Daishin Securities. “They not only help re-estimate the value of Korean assets, but also induce improvement in foreign investors' inflow into the market.”

While the won-dollar exchange rate was continuing to drop throughout last week, foreign investors were found to have net purchased local stocks worth 589 billion won ($505 million) last week, only excepting Thursday's trading session.

“Recently, emerging markets' currencies have shown signs of strengthening. Appreciations of the won and yuan are particularly noticeable, considering the fact that when the KOSPI exceeded the 2,600 mark back in January 2018, the won-dollar exchange rate stood at the 1,060 won level, there's still room for more foreign investors' inflow into the local stock market,” said Shin Seung-jin, an analyst at Samsung Securities. “If more foreign investors net buy Korean stocks, they would mostly pick well-known blue-chip ones like Samsung Electronics, Hyundai Motor and battery companies as well as IT-platform companies like Naver and Kakao.

Regarding whether the strengthened won could negatively impact local export companies' price competitiveness, market analysts explained that it could be offset by a stronger earnings momentum with the Korean economy's strong fundamentals.

“In 2021, the KOSPI's major export sectors, in particular semiconductors and cars, show some 40 percent and 53 percent of profit momentum, respectively. It is expected that exchange rates would not have a major effect on export companies next year,” said Lee from Daishin Securities.