Retail investors' net outflow from S.Korean stocks deepens; foreign buying seen as key to KOSPI rebound

A recent analysis indicates that the "capital offensive" by retail investors, which previously supported South Korea's stock market, is losing momentum. Foreign buying is now emerging as a key factor in whether the Korea Composite Stock Price Index (KOSPI) can stage a rebound. If tensions in the Middle East ease and international oil prices along with U.S. long-term interest rates stabilize, foreign capital may flow back into the South Korean domestic market.

Key Insights from Shinyoung Securities

Kim Hak-kyun, Head of the Research Center at Shinyoung Securities, stated during a press briefing held at the Korea Exchange in Yeouido, Seoul, on the 22nd that retail investor funds offset foreign selling pressure in the first half of this year. However, he noted that it will be difficult for the market to see a major turnaround relying on retail investors going forward.

"The scale of foreign buying will determine the market's supply-demand structure in the second half, which will be distinctly different from the first half," Kim said.

Retail Capital Outflows Accelerate

Using a calculation method that combines unsettled transactions and margin loans to track real capital flows, Kim reported the following:

• August: Net outflow of retail funds from the South Korean stock market reached 13.5 trillion won (equivalent to $9.7 billion).
• As of the 18th of this month: Cumulative retail fund outflows totaled 9.83 trillion won (equivalent to $7.1 billion), with the average daily outflow already exceeding August levels.

Unusual Investor Behavior Post-Market Correction

Kim highlighted a departure from past patterns: retail investors are now withdrawing funds immediately after a market correction. In previous cycles, when the market peaked and corrected, retail investors typically engaged in cost-averaging strategies by adding more capital. This time, however, funds have continued to flow out even as stock prices declined. Kim attributed this exodus to the shock caused by the sharp short-term market correction.

Key Variables for Foreign Buying

Kim identified three core variables that could reverse foreign buying behavior:

• The Middle East conflict
• International oil prices
• U.S. long-term interest rates

He explained that if the conflict eases, oil prices will stabilize, and yields on U.S. long-term Treasury bonds will decline, prompting global capital to shift toward non-dollar assets. He also noted that the easing of downward pressure on the Korean won and the fact that foreign investors have already significantly reduced their holdings of South Korean stocks both improve the likelihood of a supply-demand recovery in the market.

Focus on Market-Driven Long-Term Rates

Kim emphasized that the market should focus on long-term interest rates formed by market pricing, rather than whether the U.S. Federal Reserve continues to raise its policy benchmark rate. He assessed that the recent rise in U.S. long-term bond yields is primarily due to an expanding fiscal deficit and rising oil prices driven by the Middle East conflict, rather than an overheating economy or endogenous inflationary pressure.

"The recent stock market rebound is because oil prices and U.S. bond yields have fallen. The Fed is merely reacting passively. What is driving the market now is not the Fed, but the White House," Kim said.

He further predicted that the situation in the Middle East will influence the direction of the South Korean stock market through oil prices, long-term U.S. bond yields, and foreign capital flows.