[Return of Foreigners] ② Still ‘Buy Korea’ vs Anytime ‘Bye Korea’

Additional Purchases Considering Exchange Rates... Economic Recession, Poor Earnings
KOSPI Downside Rigidity Secured, Low Risk of Sharp Decline

[Asia Economy Reporter Lee Seon-ae] Opinions are divided in the securities industry on whether the foreign net buying that led the KOSPI rally in January will continue. The 'optimistic view' expects it to persist for the time being, while the 'cautious view' sees it as a short-term phenomenon.

The securities industry cites the weak dollar and expectations of further yuan strength as reasons why foreign net buying will continue. Park Sang-hyun, a research fellow at Hi Investment & Securities, said, "The possibility that the U.S. Federal Reserve's rate hike cycle may end at least in the first half of the year could act as additional downward pressure on the dollar, which, along with further yuan appreciation, will strengthen the global capital's 'buy emerging = buy China' phenomenon," adding, "Considering the strengthening preference for risk assets among global capital, foreign net buying of domestic stocks is also expected to continue." He added, "Although it is difficult to expect aggressive domestic stock net buying like in 2009-2010, given that the Korean economy and global policies are not the same as then, considering the currently low foreign ownership ratio of domestic stocks and expectations for the Chinese economy, additional inflows of foreign capital can be anticipated."

Currently, it is no exaggeration to say that the inflow of global capital into emerging markets is led by China. The global capital's 'buy China' phenomenon is driven by both the long-term sluggishness of the Chinese stock market and expectations for reopening (resumption of economic activities). The dollar weakness due to expectations of Chinese economic stimulus is increasing the attractiveness of the domestic stock market and attracting foreigners. Lee Jae-man, a researcher at Hana Securities, explained, "Expectations for recovery in China's domestic demand lead to yuan appreciation, which in turn connects to won appreciation," adding, "If the yuan-dollar exchange rate returns to the pre-Chinese real estate regulation level, it would be 6.5 yuan, and applying this regression to the won-dollar exchange rate results in 1,150 won, indicating that foreigners have net buying capacity."

According to Hana Securities, the proportion of foreign ownership in the KOSPI market capitalization decreased from 39.3% in February 2020 to 30.4% in September last year. The won-dollar exchange rate was 1,160 won in February 2020 and 1,430 won in September last year. As of the 27th, the foreign stock ownership ratio is 31.89%, which is lower than the pre-COVID-19 pandemic peak of 39.29% on February 24, 2020.

Of course, the cautious view is also significant. The KOSPI has already risen more than 10% this year, supported by foreign net buying, and volatility is inevitable due to declining corporate profits. As of the 30th, the KOSPI (2,450.47) rose 224.8 points (9.17%) compared to the closing price of 2,225.67 on the first trading day of this year, January 2. As of the 27th, it rose 11.6%, marking the highest increase in about two years since November 2020, when it rose 14.3% in one month. Given the continuous rise, fatigue is expected to appear. On the 30th, the KOSPI fell 1.35%. Especially when faced with the negative factor of declining corporate profits, volatility is expected to increase further. Cho Chang-min, a researcher at Yuanta Securities, said, "Without fundamental improvements, we cannot rely solely on foreign demand indefinitely."

Above all, corporate profit forecasts continue to decline. Operating profits of KOSPI-listed companies this year are expected to be around 206.2 trillion won, down 4.6% from last year. The operating profit forecast for this year has also decreased by 4.9% in the past month. Choi Yoo-jun, a researcher at Shinhan Investment Corp., said, "As the earnings season began, the downward revision speed of profit estimates accelerated, but the KOSPI continued to rebound," adding, "There is room for profit forecasts this year to be lowered further." Jung In-ji, a researcher at Yuanta Securities, emphasized, "The trend of operating profit forecasts explains the direction of the KOSPI well." Ahn Young-jin, a researcher at SK Securities, analyzed, "If monetary tightening does not completely end and turn to easing, it will be difficult for the KOSPI to rise above 2,500, which corresponds to a price-to-book ratio (PBR) of 1."

However, the prevailing view is that a sharp decline in the KOSPI is unlikely. The risk of a stock market decline immediately after strong foreign buying tends to decrease in the short term. Especially now, since the buying trend follows about two years of a declining market, the risk of a sharp drop is considered low. Byun Jun-ho, a researcher at IBK Investment & Securities, explained, "Since 2009, when foreigners have net bought more than 0.2% of the market capitalization on a monthly basis (net buying of about 5 trillion won), the KOSPI has risen an average of 1.7% the following month," adding, "Among 17 cases, the lowest decline was only 2.3%." He added, "Even when foreigners net bought more than 3 trillion won monthly, the KOSPI rose an average of 1.8% the next month, and the lowest decline was 1.8%." Byun also said, "Considering these cases, even if the KOSPI undergoes a correction in February, the correction is unlikely to be large, and March to April is a period when the end of U.S. tightening and expectations for Korea's export bottoming out may materialize, so the risk of a stock market downturn is not high."