Wave of Withdrawals Threatens Korea’s Stock Market

Last month, a 43-year-old office worker, Kim Jin-young, withdrew money from her equity fund, which she had held for three years by putting one million won ($1,050) every month. “People told me to take my profits by removing the equity fund from my portfolio when stock prices are high,” she said.

Just like her, an increasing number of fund investors are taking their money out of the funds. As much as 300 billion won ($315 million) was withdrawn from the market in one day. Last month, nearly 2.3 trillion won ($2.42 billion) flowed out of the fund market.

Some are concerned that this “withdrawal crisis” could lead to a huge drop in stock prices.

Last year, amid many difficulties, the Korean stock market avoided significant losses thanks to the inflow of money into equity funds. The wave of reselling, however, is pulling down stock prices. With the recent China shock resulting in subsequent drops in the world equity market, outflows of money will deal a heavy blow to the Korean stock market.

Daily withdrawals of 300 billion won-

The money withdrawn from equity funds in Korea is at a serious level. In February, the market lost 2.29 trillion won ($2.41 billion) due to fund reselling. On February 16 alone, a staggering 324.3 billion won ($340 million) was withdrawn from the market.

When customers ask for money withdrawal, asset management companies have to sell their stocks to pay them. This results in lower stock prices.

Last month, the net sales of stocks by asset management firms was 2.13 trillion won ($2.24 billion), the highest since January 2004 (2.24 trillion won).

Behind this money withdrawal from equity funds is the booming foreign equity fund market.

There was a surge in investor transfers to foreign funds after last year’s upsurge in Chinese and foreign fund markets. The amount of money flowing to foreign markets reached 3.45 trillion won ($3.63 billion), including 2.646 trillion won ($2.78 billion) in February.

Interestingly, investors who have held their equity funds for three years or more lead this trend.

“The fund reselling is causing quite a disruption in fund management,” said Mirae Asset Investment Management CEO Koo Jae-sang.

Disruption in market stability-

The red light is now on in the domestic stock market with this huge withdrawal of money.

Last month, the withdrawal shock on the market was not that significant as foreigners actively purchased stocks.

Since the China shock, however, the prospects for Korean stock prices are uncertain because even foreigners are selling their equities. By February 26, foreigners’ net purchases were at 1.58 trillion won ($1.66 billion). Over the past four days, after the sharp fall of the Shanghai Composite Index, however, their net sales amounted to 712 billion won ($750 million).

“Korea’s stock market is facing a critical situation due to the combined effects of global equity shock and huge amounts of money withdrawn from its equity markets,” said investment strategy team head Kim Se-jung of Shinyoung Securities.

ssoo@donga.com