[Good Morning Stock Market] Increased Domestic Stock Holding Limit of National Pension Service... Impact Uncertain

The Main Influencers of Jisu Are Foreigners
Foreigners Lead While Individuals Push the Trend

[Asia Economy Reporter Byungseon Gong] On the 9th, the National Pension Service (NPS) decided to increase its domestic stock holding limit, but analysis suggests that the impact on stock prices will not be significant. Instead, foreigners are identified as the main agents influencing the index. However, improvements in supply and demand for large-cap stocks such as semiconductors and chemicals are expected.

◆ Jaeseon Lee, Researcher at Hana Financial Investment = On the 9th, the NPS approved a proposal to expand the allowable deviation range for strategic asset allocation from around 2% to 3%. Following this decision, the NPS's domestic stock holding limit has been expanded to a range of KRW 123.7 trillion to KRW 183.9 trillion, based on this year's total asset management target of KRW 897 trillion to KRW 929 trillion.

This decision by the NPS is expected to contribute to improving supply and demand by reducing mechanical selling pressure from pension funds, but its influence on the overall market direction is likely to be limited. This is because foreigners are the main agents significantly affecting the index level rise. Additionally, the allowable deviation range for tactical asset allocation has been reduced from around 3% to 2%, so the total allowable deviation remains unchanged from before.

Semiconductors and chemicals are expected to benefit positively from the NPS decision. The NPS has been realizing profits mainly from large-cap stocks to maintain its domestic stock ratio. Since the end of January, sectors with stronger pension fund selling pressure compared to the KOSPI have been energy, chemicals, semiconductors, IT home appliances, and software, in that order. Notably, semiconductors and chemicals are the sectors with the most companies where the NPS's shareholding ratio has decreased. These sectors also include stocks whose returns have been sluggish after the correction phase despite profit improvement potential.

◆ Younghwan Kim, Researcher at NH Investment & Securities = The main drivers of the domestic stock market's rise are individuals and foreigners. Foreigners lead, and individuals follow. Since mid-February, individuals have shown a pattern of net buying when prices fall and net selling when prices rebound. Historically, when the stock market undergoes a correction, individuals respond with box-range trading, and when they judge the market to be in a genuine upward trend, they shift to a trend-following trading pattern.

Individual funds are expected to return within the next month, but the key is whether the index surpasses 3200. Experience shows that when the proportion of rising days within two months exceeds 70%, individual fund inflows accelerate sharply. Particularly, KOSPI 3200 marks the point when stocks held by individuals enter a profit zone. Once individual holdings enter the profit zone, individual investors are likely to buy more confidently.

Foreigners are the agents expected to drive the KOSPI up to the 3200 level. From February to last month, foreigners sold domestic stocks due to concerns over liquidity withdrawal by the People's Bank of China and U.S. inflation worries.

However, excluding these financial instability factors, economic conditions are favorable for foreign capital to flow into the domestic stock market. The global economy has entered a recovery phase, and South Korea's export improvement and KOSPI earnings forecasts are being revised upward. Although concerns about a COVID-19 resurgence remain, rapid vaccination progress may mitigate the impact compared to before.

◆ Jaekyun Ahn, Researcher at Korea Investment & Securities = Investment sentiment is stabilizing amid favorable export conditions. Both manufacturing and non-manufacturing sectors are recovering, and consumer sentiment continues to rise. Last month, the consumer sentiment index reached 100.5 points, surpassing the baseline of 100 for the first time since January last year. However, it is difficult for the Bank of Korea to upgrade its economic assessment. Expectations for improvement in current and future economic conditions remain low, especially among self-employed individuals.

This week, a further decline in U.S. bond yields is anticipated. Concerns about early interest rate hikes in financial markets are retreating, and the possibility of technical adjustments related to the Federal Reserve's (Fed) Treasury purchases is emerging. The relative strength in the 5-10 year mid-term range is expected to continue. After absorbing a Treasury auction of USD 120 billion (approximately KRW 135 trillion) early this week, yields are expected to decline. The outlook for the 10-year U.S. Treasury yield remains stable downward in the second quarter, with 1.75% as the upper limit.