[Financial Stability Report] "Possible Decline in Overseas Investments by Domestic Residents... Caution Needed Over Increased Volatility"

Clear Reduction and Withdrawal Observed Before and After Past Economic Slowdowns
Similar Pattern in Korea, Following Global Trends with a Time Lag

The Bank of Korea has projected that there may be a turning point in the rapid increase of overseas stock investments by domestic residents. The central bank noted that, in preparation for a potential economic slowdown, the upward trend could either decelerate or reverse. It also pointed out that if capital flows change rapidly, this could impact financial market volatility.

Yonhap News Agency

On June 25, the Bank of Korea presented this analysis in its Financial Stability Report.

Looking at the flow of global fund capital during past periods surrounding economic recessions, the trends varied by economic cycle phase. In Phase 1 (just before the recession to its onset), there was an increased inflow of funds into safe assets. In Phase 2 (from the start of the recession to the bottom), most funds experienced outflows. In Phase 3 (from the bottom to the recovery), inflows resumed, mainly into bond funds.

During Phase 1, a preference for safe assets led to outflows from equity funds, while bond funds saw inflows. In Phase 2, as investor sentiment deteriorated, there was a preference for pension and cash-equivalent assets, resulting in outflows from both equity and bond funds. The outflows were greater for riskier assets such as growth stock funds and high-yield (speculative grade) funds. In Phase 3, these funds shifted back to inflows, with a recovery led by growth stocks.

By country, the analysis showed that overseas investments by residents of Europe and Taiwan began to decrease even before the onset of a recession. Once a full-scale recession started, the reduction intensified or funds were withdrawn, particularly from overseas stock investments. Korea exhibited a similar pattern to Europe and Taiwan.

Recent trends in global fund flows show that outflows from growth stocks and speculative-grade bonds have increased, resembling the pattern seen in Phase 1, just before a recession. For domestic individual investors, overseas stock investment inflows have gradually slowed since April, and after April 24, net withdrawals were observed.

The Bank of Korea stated, "Recent global investment capital flows suggest that investors are positioning themselves in anticipation of a potential economic slowdown." It added, "Given that the overseas investment trends of domestic residents tend to follow global capital flows with a lag of two to three months, there is a possibility that the previous upward trend may reach a turning point." The central bank also cautioned, "If global investment and resident overseas capital flows change rapidly, financial market volatility could increase, so close attention is warranted."