[Inside Chodong] "Fed Up with the Domestic Market" Retail Investors Flee Abroad

Changhwan Lee, Deputy Head of the Economic and Financial Department

An evening gathering with friends I hadn’t seen in a while. Conversations ranged from family to work life, and naturally, stock investment came up. Friend A said, “I only invest in Korean stocks, and now I’m heavily underwater,” drawing sympathetic looks from several friends. Friend B remarked, “So you’re the poor soul still stuck in the KOSPI (Korean stock market).” B added, “I lost too much in the Korean market, so I switched to U.S. stocks early on and have been making some gains.”

Then other friends chimed in one after another: “I made money buying Nvidia,” “I bought Tesla,” “U.S. dividend ETFs are stable.” Eventually, friend C said, “I put all my assets except for the house I live in into U.S. stocks.”

Though these are close-to-home examples, nowadays it’s hard to find individual investors without overseas stocks. Whether direct or indirect investment, the trend clearly favors foreign stocks over domestic ones.

Statistics confirm this. According to the Korea Securities Depository, as of the first half of this year (end of June), the amount of foreign currency stocks held by domestic investors reached $94.64 billion (about 131 trillion KRW), a record high and a 23.1% increase from the end of last year. Of these foreign stocks, 90.7% are U.S. stocks.

Individuals net sold about 13.47 trillion KRW worth of stocks in the KOSPI market during the first half of this year. The net selling amount from last year through this year totals around 30 trillion KRW. It is presumed many sold Korean stocks to buy U.S. stocks.

Why have retail investors turned their backs on the KOSPI? There are several reasons. First, unlike in the past when investing in overseas stocks was inconvenient, now it’s a convenient world where you can trade foreign stocks anytime just by installing a securities firm’s app on your smartphone. Even at work, it’s easy to exchange dollars and invest in overseas stocks.

But the bigger reason is that the domestic stock market and companies are less attractive compared to overseas markets. The index growth rates alone are dismal. This year, the KOSPI index rose about 4%, while the Nasdaq rose about 20%, and the S&P 500 increased about 15%. Even the KOSDAQ, where many individuals invest, is negative this year.

Shareholder returns are also a mess. According to KB Securities, from 2013 to 2022, the average shareholder return ratio of Korean listed companies was 29%. During the same period, the U.S. was 92%, and other developed countries excluding the U.S. were 68%, meaning Korea’s rate was less than half. It’s even lower than China’s 32%. Korean companies are stingy with dividends and lack the willingness to boost stock prices by buying back and retiring shares.

Meanwhile, unreasonable corporate governance issues continue to arise. A recent controversy involves the merger of Doosan Bobcat and Doosan Robotics. The problem raised was that the merger ratio favored Doosan Robotics, which has never turned a profit, simply because their market capitalizations were similar, despite Doosan Bobcat generating a solid annual profit of 1 trillion KRW. Similar controversies have occurred at Hanwha and SK as well. It is said that such unfair disputes rarely happen in developed countries, so why do these controversies arise even in well-known large Korean companies?

On top of this, the opposition party is pushing for the introduction of a financial investment income tax (금투세), which could further dampen the already poor stock market sentiment. If the securities transaction tax is not abolished and the financial investment income tax is imposed, double taxation controversy is unavoidable. If the financial investment income tax is introduced, the attractiveness of Korean stocks as an investment is likely to decline further. There are concerns about whether retail investors will ever return to the Korean stock market.