[MarketING] Strong Stock Market Uptrend Driven by Foreign Buying Pressure

KOSPI Rises for 6 Consecutive Days
KOSDAQ Recovers Above 850 After 5 Days of Gains

The KOSPI has risen for six consecutive days, settling above the 2550 level. The KOSDAQ also continued its upward trend for the fifth day, recovering above the 850 level. Foreign buying momentum is driving the stock market's strength. Since there is a low likelihood of foreigners withdrawing from the domestic stock market in the near term, the upward trend is expected to continue.

KOSPI Rises for 6 Consecutive Days... KOSDAQ Recovers Above 850

On the 22nd, the KOSPI closed at 2557.08, up 19.29 points (0.76%) from the previous session. The KOSDAQ ended the day at 852.04, rising 10.32 points (1.23%).

[Image source=Yonhap News]

Foreign buying drove the index gains. On that day, foreigners net purchased 246.3 billion KRW in the KOSPI market and 216.9 billion KRW in the KOSDAQ market. Foreigners have maintained net buying in the KOSPI market for five consecutive trading days. Institutions net bought 534 billion KRW in the KOSPI market but net sold 4.4 billion KRW in the KOSDAQ market. Individuals sold 788.4 billion KRW in the KOSPI market and 202.1 billion KRW in the KOSDAQ market.

Kim Seok-hwan, a researcher at Mirae Asset Securities, analyzed, "Risk appetite recovered following the Federal Reserve's indication of a rate hold, and the dollar weakened, leading foreigners to increase net buying in both spot and futures markets, resulting in broad strength among large-cap stocks." He added, "Low-price buying centered on secondary battery stocks, which had recently undergone corrections, contributed to the additional rise in the KOSDAQ index." On the same day, the won-dollar exchange rate closed at 1318.1 won, down 8.6 won from the previous day, marking a drop to the 1310 won level for the first time in about a month in the Seoul foreign exchange market.

Foreign buying inflows into secondary battery stocks led to a significant rally. On that day, EcoPro BM rose 4.42%, EcoPro 6.77%, and L&F 5.7%, driving the KOSDAQ's recovery above 850. Foreigners net purchased EcoPro the most at 55.1 billion KRW, followed by SK Hynix (47.9 billion KRW), EcoPro BM (35.7 billion KRW), Samsung Heavy Industries (27.6 billion KRW), and POSCO Future M (21.3 billion KRW).

Lee Kyung-min, a researcher at Daishin Securities, stated, "Until mid-March this year, foreigners followed a pattern of heavy buying followed by partial profit-taking based on KOSPI earnings, valuation trends, index levels, and exchange rate changes. However, since March 22, as the won-dollar exchange rate recovered above 1300 won and leveled up to 1340 won, foreigners have net purchased 5.33 trillion KRW." He analyzed, "Despite the unilateral won depreciation, the continued net buying by foreigners is due to a change in trading patterns based on fundamental changes."

The KOSPI's 12-month forward earnings per share (EPS) had been declining since its peak in August 2021 but has shown a rebound from the low point around late March to early April this year. The researcher said, "The 12-month forward net income increased by 8.8% and forward EPS by 9.4% from the low point. Considering the quarterly operating profit, net income forecasts for 2024, and export changes after the second quarter, the upward trend in 12-month forward net income and EPS is expected to continue for the time being."

This change affected valuation and EPS relative strength compared to developed country stock markets. The 12-month forward EPS relative strength against developed countries, which had been declining since June 2021, has been attempting a rebound since the low point at the end of March. The researcher explained, "The 12-month forward price-to-earnings ratio (PER) relative strength against developed countries, which had sharply risen since 2022, also reversed downward after peaking in the third week of April. From the perspective of foreign investors, the attractiveness of the Korean stock market, which had weakened sharply over two years, appears to be passing a turning point."

Foreign demand is expected to lead the stock market direction. The researcher predicted, "Stable and improving earnings forecasts have eased valuation burdens and restored earnings strength. As the won's unilateral weakness against the dollar subsides and upward pressure increases, foreign net buying has continued. Given the expected continuation of earnings improvement and the likely easing of won depreciation pressure, foreigners are expected to regain leadership in the KOSPI's future trend."

Foreign Buying Momentum Expected to Continue for the Time Being

Foreign buying momentum driven by fundamental changes is expected to continue for the time being.

Kim Dae-jun, a researcher at Korea Investment & Securities, said, "With the probability of Fed rate hikes lowered and considering China's foreign exchange policy and Korea's fundamentals, the direction of foreign demand is unlikely to change." He added, "Considering domestic and international variables, foreign demand will be favorable for the stock market."

The pace of U.S. rate hikes is expected to slow. Last week, Fed Chair Jerome Powell mentioned that banks' lending attitudes have changed due to liquidity issues, lowering the likelihood of a rate hike. This is expected to reduce the possibility of a rate hike in June and weaken the dollar's strength.

Additionally, as China is expected to defend the yuan's value, it is likely to affect the won-dollar exchange rate. Recently, the yuan-dollar exchange rate surpassed 7 yuan. If the yuan depreciates, inflationary pressure could intensify, slowing growth. Therefore, China is likely to proactively lower the foreign exchange reserve requirement ratio to prevent this.

Kim said, "Due to these factors, won volatility is expected to be limited," adding, "The foreign investors' net buying stance, sensitive to exchange rates, is unlikely to change."