Retail investors pull cash from Korean stocks; foreign inflows seen as key to KOSPI rebound

The capital landscape of what has been dubbed the world's "strongest stock market" is undergoing a transition.

According to a research head at a major South Korean securities firm, the retail investor "capital offensive" that previously supported the Korean stock market is losing momentum. Foreign buying will be key to whether the Korea Composite Stock Price Index (KOSPI) can rebound. If tensions in the Middle East ease, and global oil prices along with U.S. long-term interest rates stabilize, foreign capital may flow back into the domestic Korean market.

Retail Investor Momentum Fades

On September 22, Kim Hak-kyun, head of the research center at Shinyoung Securities, stated in a news briefing that while retail investors overwhelmingly offset foreign selling in the first half of the year, a significant shift in retail activity is unlikely going forward. He noted, "The buying behavior of foreign investors will depend on a supply-demand structure different from that of the first half."

Based on Kim's estimates of actual capital flows (including unsettled transactions and margin loans), retail funds saw a net outflow of 13.5 trillion won (approximately $9.7 billion) from the domestic stock market in August. As of September 18, cumulative outflows for September had reached 9.83 trillion won (approximately $7.1 billion), with average daily outflows exceeding August levels.

Kim also pointed out that, unlike in the past, retail funds have continued to flow out even after market corrections. He attributed this to the shock experienced by retail investors during sharp, short-term market downturns.

Looking ahead, Kim identified the Middle East conflict, global oil prices, and U.S. long-term interest rates as key factors influencing the direction of foreign buying. He explained that if geopolitical tensions ease, oil prices would stabilize and U.S. long-term yields would decline, prompting global capital to shift toward non-dollar assets.

He also noted that the weakening trend of the Korean won has eased, and foreign investors have significantly reduced their holdings in Korean stocks, both of which increase the likelihood of improved supply-demand dynamics in the future.

Kim emphasized that the market should focus on market-determined long-term interest rates rather than whether the Federal Reserve will further raise its benchmark rate. The recent rise in U.S. long-term yields, he argued, is more attributable to fiscal deficit expansion and rising oil prices due to the Middle East conflict, rather than economic overheating or underlying inflationary pressures.

He further predicted that developments in the Middle East conflict would influence the direction of the Korean stock market through oil prices, long-term yields, and foreign capital flows.

The Double-Edged Sword of Leverage

Looking back at the Korean stock market's performance this year, retail investors and leveraged funds were initially the biggest contributors.

Benefiting from increased global AI capital expenditure and rising memory chip prices, the KOSPI index rose from around 4,200 points at the start of the year to above 9,000 points by mid-June, more than doubling within the year. The strong performance of the memory chip sector was the core driver of the index's rise. According to analysis by Guohai Securities, SK Hynix and Samsung Electronics rose 307.8% and 179.1%, respectively, in the first half of 2026. The combined market capitalization of these two companies rose from about 35% of the total KOSPI market cap at the start of the year to a peak of approximately 57% on June 25.

Retail funds poured in. Data shows that retail investors account for a very high proportion of trading in South Korea. As of June 24, the total number of domestic stock trading accounts was 108.77 million, while South Korea's total population is just over 50 million, meaning an average of more than two stock accounts per person. A significant amount of capital flowed in through high-leverage ETFs.

However, the double-edged nature of high leverage quickly became apparent. In July, the Korean stock market began a deep correction. The KOSPI index once fell below 5,300 points, nearly halving from its year-to-date high.

South Korean regulators also intervened intensively in July. On July 16, financial regulators announced several stringent measures, including suspending the listing of new single-stock leveraged ETFs and raising the minimum margin requirement from 10 million won to 30 million won, payable only in cash. On July 29, after the KOSPI triggered circuit breakers for two consecutive days, the government announced a second phase of additional measures, including limiting the maximum proportion of leveraged ETFs in an investor's total portfolio and increasing transaction costs to curb speculation.

The backlash from leveraged funds was swift and severe. In a report in early August, CITIC Securities Research noted that margin balances in the Korean stock market fell from a peak of 38.6 trillion won on June 24 to 27.4 trillion won on August 3, a single-month contraction of 11 trillion won, or 29%. This erased all the incremental leverage accumulated between February and June during the semiconductor boom.

CITIC Securities analyzed that while the peak margin balance of 38.6 trillion won represented less than 1% of the total market capitalization, leverage was extremely concentrated in a single sector. The denominator of relative leverage was fragile; when the market corrected, the denominator shrank sharply, but the 38 trillion won in principal and interest owed by retail investors to brokerages (for core stocks) remained a hard debt. Additionally, various other forms of leverage exist in the Korean over-the-counter market, including CFDs, securities-backed loans, and OTC options/TRS, which are not counted in the numerator. Furthermore, the listing of 2x leveraged single-stock ETFs changed the transmission path of tail risk, leading to extreme long-short imbalances, and the rules for forced liquidation at the close could easily trigger a spiral of stampedes.

Recently, the KOSPI index has been oscillating in the 6,800 to 7,100 point range, with frequent intraday rallies followed by pullbacks.

Divergent Views Among Foreign Investors

With retail funds continuously flowing out and leveraged funds severely hit, the return of foreign capital has become a key variable for a rebound in the Korean stock market.

Simon Woo, head of Korea research at Bank of America Securities, stated that long-term agreements for chip companies and improved shareholder returns could serve as the next catalysts to attract global capital back to Korean tech stocks. In an interview on September 21, Woo said, "If long-term agreements materialize, the market will perceive Asian tech stocks as having reduced cyclicality and lower risk." At the same time, higher dividend yields and share buyback programs would also attract investors back to AI-related stocks.

On September 21, JPMorgan released a research report maintaining an "Overweight" rating on Samsung Electronics with a target price of 400,000 won, stating that the medium-term risk-reward is favorable and advising investors to accumulate the stock. The bank noted that in Samsung's third-quarter earnings preview, memory business operations remain strong, but the company faces short-term headwinds from unfavorable exchange rates, as a stronger won led to downward revisions in earnings forecasts.

Separately, UBS recently lowered its 12-month target for the KOSPI index from 8,800 points to 8,000 points, with the implied P/E ratio falling from 8x to 7x, citing rising interest rates, a stronger won, and higher oil prices.

Proofread by Xu Xin