Foreign Selling Bombardment Triggers Donghak Ants' Response... Anxious December

Record High Net Selling by Foreigners Yesterday
Year-End Foreigners' Moves Play Decisive Role
Key Countries' Indicators and FOMC as Variables
Profit-Taking Desire and Other Burdens Possible

[Asia Economy Reporter Song Hwajeong] Concerns over supply and demand instability in the year-end stock market persist. Foreign investors led a significant buying spree in the domestic stock market last month, driving the KOSPI to reach an all-time high. However, they recorded the largest-ever net selling the previous day, pulling the index down. While the "Donghak Ants" countered with the largest net buying on record to defend the index, the trading roles of foreigners and individuals reversed within a single day.

As of 9:30 a.m. on the 1st, the KOSPI stood at 2,624.89, up 1.29% (33.55 points) from the previous day. Foreign investors led the index rise by net buying approximately 44 billion KRW in the early session. Conversely, individual investors recorded net selling of about 85 billion KRW.

The previous day saw a flood of selling from foreign investors. They sold 2.4031 trillion KRW, breaking the previous largest net selling record of 1.6361 trillion KRW set on August 31. The sudden large-scale selling by foreigners is interpreted as a result of the regular Morgan Stanley Capital International (MSCI) index rebalancing. Due to the MSCI regular adjustment, South Korea's weight in the MSCI Emerging Markets (EM) index decreased by about 0.3 percentage points compared to before. The index composition was rebalanced the previous day, leading to asset adjustments and resulting in foreign selling pressure. Ha Daehun, a researcher at SK Securities, explained, "The previous day was the MSCI index rebalancing application day, and the second-largest foreign net selling day on August 31 was also an MSCI rebalancing day. In this rebalancing, India's weight in the MSCI EM index increased, and Kuwait was newly included, while South Korea's weight shrank from 12.1% to 11.8%, inevitably increasing outflow pressure from passive funds." Additionally, the sharp recent rise prompting profit-taking desires and the possibility of renewed US-China hegemonic competition also influenced foreign selling the previous day.

On the other hand, individual investors stood firm against foreign selling, reaffirming the "Donghak Ants" spirit. The previous day, individuals recorded net buying of 2.1905 trillion KRW, marking the largest net buying on record.

As foreigners showed large-scale selling ahead of December, concerns over year-end stock market supply and demand instability grew. Seo Sangyoung, a researcher at Kiwoom Securities, said, "The December stock market is expected to be decisively influenced by foreign investors' actions, with changes depending on major countries' economic indicators, the European Central Bank (ECB), and the US Federal Open Market Committee (FOMC). Especially, the KOSPI's 12-month forward price-to-earnings ratio (PER) stands at 12.8 times, significantly exceeding the five-year average of 10 times, which may increase profit-taking desires." He added that passive foreign investors' portfolio adjustments are likely, increasing the possibility of selling pressure. Some risk indicators are deteriorating, which may also dampen active foreign investors' aggressive net buying that led the market in November.

Despite these concerns, the prevailing view is that foreigners will not immediately engage in selling. One researcher noted, "The return of foreign funds to the KOSPI since November is due to the easing of US political uncertainty following Biden's election and the high attractiveness within emerging markets; these two factors remain valid. With continued upward revisions of domestic companies' earnings estimates and expectations of performance improvements led by the semiconductor sector, the domestic stock market remains attractive from a foreign investor's perspective."

Concerns about individuals' potential year-end selling are also expected to be alleviated by dividends and positive earnings forecasts. Kang Songcheol, a researcher at Shinhan Financial Investment, said, "This year, individual investors' net stock buying was record-breaking, stock price gains were high, and year-end dividends, the record-high scale of investor deposits, and upward revisions of next year's earnings forecasts will help ease concerns."