Sudden Reversal by Foreigners, Net Buying of 340 Billion Won in One Day

Bought 237.1 Billion KRW Only on KOSDAQ... Largest Scale Since August
Mechanical Rebound and Economic Recovery Expectations Likely
Individuals Massively Net Sold... Panic Selling and Forced Liquidations Combined
"GDP Growth Rebounded but Too Early to Confirm Economic Recovery"

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Foreign investors have turned to net buying in the domestic stock market after just one day. In particular, buying surged in the recently plummeted KOSDAQ market. While some analyze this as bargain hunting aimed at the 'bottom' amid expectations of economic recovery, there are also opinions that it is still too early to judge the economic recovery.

According to the Korea Exchange on the 28th, foreign investors net purchased stocks worth 343.2 billion KRW in the domestic stock market the previous day. This is a sharp reversal from a net sale of 113.3 billion KRW on the 26th, just two days earlier. Except for the net purchase of 763.9 billion KRW on the 8th, this is the largest scale so far this month. Especially, the proportion of KOSDAQ, which recently plunged, was large. They net purchased 237.1 billion KRW worth of KOSDAQ stocks the previous day. This is more than twice the net purchase amount of 104.6 billion KRW in KOSPI. It was the largest purchase since August 31 (244.4 billion KRW net purchase). It ranks fourth in daily net purchase scale this year.

This is analyzed to be due to a combination of mechanical rebound following the recent plunge and expectations of domestic economic recovery. On the 26th, KOSDAQ closed at 778.02, down 3.71% from the previous day. It opened at 808.06, up 0.01% from the previous session, but soon started to decline sharply from early trading. KOSDAQ falling to the 770 level is the first time since July 20. Sangyoung Seo, a researcher at Kiwoom Securities, explained, "As large-scale COVID-19 resurgence occurs in the US and Europe and the US presidential election is just a week away, various uncertainties have increased, making investor sentiment unstable. In particular, the continued poor performance of some newly listed stocks triggered selling pressure in the bio sector, which had a high valuation burden." He added that due to this unusual sharp drop, foreign investors entered with buying aimed at a mechanical rebound.

Expectations of domestic economic recovery also seem to have played a positive role. The Bank of Korea announced the previous day that the preliminary real Gross Domestic Product (GDP) growth rate for the third quarter of this year was 1.9% compared to the previous quarter. Although the base effect is significant due to consecutive negative growth rates in the first quarter (-1.3%) and second quarter (-3.2%), the rebound itself has raised expectations for economic recovery in the second half.

On the other hand, individual investors sold off stocks massively in the KOSDAQ market. Individuals net sold 227.9 billion KRW worth of stocks in KOSDAQ. This is the largest scale since June 16 (488.5 billion KRW). It appears that the panic caused by the sharp index drop was compounded by forced sales of stocks bought on margin loans. Forced sales occur when the stock price of shares purchased with borrowed money from securities firms falls, lowering the collateral ratio, and the securities firm forcibly sells the stocks to recover the loan. According to the Korea Financial Investment Association, the 'actual forced sale amount compared to margin loan balance' recorded 22.3 billion KRW on that day, the largest this month.

However, there are analyses that it is still too early for economic recovery. Private consumption recovery remains weak, and recently, new COVID-19 cases have surged in the US, Europe, and other regions. Regarding the GDP growth rate announcement, the Bank of Korea stated, "Although the third-quarter growth rate rebounded, it has not reached the level of the fourth quarter of last year before COVID-19, so it is insufficient to call it a V-shaped rebound. COVID-19 is resurging in Europe and the US recently, so conservatively, we judge that the annual growth rate is still within the forecast range."