[Viewpoint] Foreign 'Sell Korea' Offers a Bargain-Buying Opportunity

Seojun Sik, Professor of Economics at Soongsil University

The domestic and international financial markets are in turmoil. Foreign investors have sold off 15 trillion won worth of domestic stocks since the beginning of this year. As that amount of money was taken out, the won-dollar exchange rate approached its highest level in 10 years. Strangely, whenever global economic uncertainty arises, there is a particularly strong sell-off by foreigners in the Korean stock market, causing the exchange rate to surge sharply. This phenomenon occurred during the US financial crisis, the Eurozone crisis, and the global COVID-19 pandemic. The same pattern is repeating this year amid concerns caused by US interest rate hikes, the Russia-Ukraine war, and China's lockdowns. When foreign investors’ 'Sell Korea' trend intensifies as it does now, economic crisis theories inevitably emerge.

However, there is no need to be vaguely afraid based solely on the outward appearance of these phenomena. The fundamental reason foreign investors sell Korean stocks despite no problems with the Korean economy or companies lies elsewhere. Although South Korea has already joined the ranks of advanced economies economically, its financial market has not yet been included in advanced market indices and remains part of emerging market indices. Just as domestic stock funds generally invest based on the KOSPI index by purchasing stocks included in the KOSPI, global investors who subscribe to emerging market funds invest in stocks included in emerging market indices. Korean stocks account for about 12% of the emerging market index.

The problem is that when global economic uncertainty arises, funds flow out of emerging market indices faster than from advanced market indices. Many investors perceive emerging markets as carrying greater risk, so even when economic instability is caused by problems in some advanced countries, capital outflows tend to be more severe from emerging market funds. Moreover, in a year like this when issues with Russia or China have surfaced, the speed of capital outflows would have been even higher. Another issue is that in such cases, the selling pressure in the Korean market is stronger than in other emerging markets. This is because the Korean stock market, with its high liquidity, is advantageous for quickly raising funds in urgent situations.

Knowing these reasons allows one to use such situations as opportunities. Since the decline in prices is caused by foreign selling rather than fundamental problems with the national economy or corporate earnings and value, it can be seen as a good chance for bargain buying. For example, if one holds dollar funds as a precaution, they could adopt an effective investment strategy by selling dollars when their price is high and using the proceeds to buy domestic stocks. During past financial crises or the COVID-19 pandemic, those who timed their trades to coincide with stock price drops and dollar strength were able to achieve significant returns.

This time as well, it is expected that once overseas conditions stabilize, funds that exited emerging markets will return. In particular, strong buying inflows will target Korean stocks, which experienced intense selling pressure. With such expectations, I have sold as many of my held dollars as possible and purchased some large-cap stocks (naturally, foreign selling was concentrated in large caps) whose prices have fallen relatively more. However, it is also important to carefully observe how this situation differs from past financial crises or the COVID-19 pandemic. In those two cases, strong monetary easing measures followed, but this time, monetary tightening is likely to continue. While buying stocks at lower prices, it would be more advantageous to focus on value stocks rather than growth or cyclical stocks.

Seojun Sik, Professor of Economics, Soongsil University