[MarketING] Passive Supply and Demand Amid Heightened Caution

KOSPI Falls, KOSDAQ Ends Higher Amid Mixed Trends
Foreigners Net Sellers This Month

[Image source=Yonhap News]

The domestic stock market closed mixed. While the KOSPI declined, the KOSDAQ rose, recovering the 800-point level. Foreign selling pressure led the KOSPI's decline. Due to financial instability and caution ahead of this week's U.S. March Federal Open Market Committee (FOMC) meeting, supply and demand are expected to remain limited for the time being.

KOSPI Falls Amid Foreign Selling

On the 20th, the KOSPI closed at 2,379.20, down 16.49 points (0.69%) from the previous session. The KOSDAQ ended the day at 802.20, up 4.81 points (0.60%). Both indices started lower but turned upward early in the session; however, the KOSPI fell back, while the KOSDAQ maintained its upward momentum and reclaimed the 800 level.

Foreign selling pressure led to the KOSPI's decline. On that day, foreigners sold 205.9 billion KRW in the securities market. Although institutions and individuals bought 106.7 billion KRW and 89.6 billion KRW respectively, it was insufficient to defend the index. In the KOSDAQ market, individuals purchased 134.2 billion KRW, pushing the index above the 800 mark. Foreigners and institutions net sold 38.1 billion KRW and 60.3 billion KRW respectively.

Seokhwan Kim, a researcher at Mirae Asset Securities, analyzed, "Despite the news of UBS's acquisition agreement of Credit Suisse (CS), uncertainty over this week's FOMC rate decision has increased, dampening investor sentiment. The won-dollar exchange rate also started lower but rose more than 10 won during the session due to foreign selling, increasing pressure."

Foreign buying, which led the market rebound in January, has shifted to net selling this month. Foreigners have net sold 1.2887 trillion KRW in the domestic stock market this month. Jaewon Choi, a researcher at Kiwoom Securities, explained, "In February, foreign investors' fund flows showed no clear direction and were limited, but in March, net selling has reemerged. As of the 17th, individuals and institutions net bought 315.2 billion KRW and 362.6 billion KRW respectively in the securities market, while foreigners recorded net sales of 836 billion KRW."

Foreigners' movements are increasingly determining sectoral trends. According to Kiwoom Securities, in the KOSPI, the IT electronics sector, which posted the highest returns, saw about 70% of net buying volume attributed to foreigners. Conversely, in sectors with lower returns such as shipbuilding, securities, and banking, foreigners accounted for 47%, 77%, and 100% of net selling volume respectively. In the KOSDAQ, sectoral differentiation is driven by individual investors' activity. The chemical sector, boosted by the secondary battery theme, had the highest returns, with individuals accounting for 100% of net buying volume. The utility sector, which posted the weakest returns, saw individuals responsible for all net selling volume, and in the media and education sector, individuals accounted for 68% of net selling volume.

Supply and demand are expected to remain limited for the time being. Researcher Choi forecasted, "Along with the March FOMC, the market is expected to continue digesting financial market instability triggered by the U.S. Silicon Valley Bank (SVB) since last week, resulting in a limited supply-demand environment and ongoing volatility."

It is not too late to monitor and respond to foreign investors' trading flows. Kyungmin Lee, a researcher at Daishin Securities, advised, "It is not too late to observe the Federal Reserve's decisions and subsequent market reactions and then respond based on foreign investors' stance. While opportunities to increase exposure around the March FOMC should be captured, given rising volatility and intensified foreign selling, it is better to proceed with caution and patience."

Financial Instability Highlights Importance of Corporate Financial Soundness

Due to recent financial instability, corporate financial soundness, such as cash holdings, is expected to become more emphasized when selecting investment stocks. This is because banks' risk expansion may lead to reduced lending to companies.

Daejun Kim, a researcher at Korea Investment & Securities, said, "If banks' liquidity shortages hinder fund supply to the real economy, companies with their own cash reserves will be relatively safer. It is necessary to check companies' cash holdings when considering investments." Kim identified essential consumer goods, communication, and IT sectors as having high cash ratios and expects these sectors to show relatively stable performance.

Financial soundness is expected to be a key factor in determining leading sectors going forward. Jaeman Lee, a researcher at Hana Securities, analyzed, "It will be difficult for U.S. commercial banks to increase corporate lending, and they are likely to maintain a conservative lending stance. Financial soundness indicators such as interest coverage ratio and free cash flow ratio are expected to be applied more strictly, which will increase preference for large-cap stocks in the stock market." He added, "In the domestic stock market, adjusting debt and maintaining high interest coverage and free cash flow ratios, along with the ability to sustain margins, will be important variables in determining leading sectors."