Are Foreign Investors Returning to Korean Stocks?

Most stock experts say Korean stocks would not have rebounded as they have this year without foreign investors amid the global financial crisis.

So much so, foreign investors are aggressively snapping up Korean stocks. Pundits say the “Sell Korea” trend that has lasted for more than four years could be reversing course.

○ Buying spree continues since March

Foreign investors since March have net bought Korean stocks worth 8.2 trillion won (6.58 billion U.S. dollars) through Thursday. Notably, they have continued to net purchase Korean stocks throughout the intervening period except for 11 days since March 10.

They have bought domestic shares despite drops in U.S. stocks the previous day and selloffs by institutional investors. As a result, the benchmark KOSPI index reached new yearly highs several times this month.

Funds that have led the foreign buying binge in the period are European capital, including those from Britain, France and Luxemburg. U.S. capital, which sold Korean shares en masse last year, is also increasing investment in the Korean stock market.

According to the Financial Supervisory Service in Seoul, U.S. capital net bought Korean stocks worth 448.9 billion won (360 million dollars) on the KOSPI market last month, the first net purchase in 22 months.

Hence, certain experts say foreigners may be gradually ending their “Sell Korea” binge, which has continued since the second half of 2004.

Foreigners aggressively bought Korean stocks in 1998 immediately after the Asian financial crisis, when investment restrictions on Korean stocks were lifted. They began to change their attention to other emerging markets around 2005, however.

Ever since, the foreigners’ selling binge had continued to expand and peaked around the time the financial crisis hit last year. The situation began subsiding early this year as the global financial market began to stabilize.

○ Uncertainty over change in direction

The biggest reason for “Buy Korea” was strong foreign expectations for the Korean and Asian economies.

Senior researcher Kim Hak-gyun at Korea Investment & Securities said, “Foreigners’ stock purchases are not restricted to Korea but are a general trend across Asia,” adding, “Foreigners have strong expectations that the Asian economy will recover the fastest from the global economic crisis due to China’s economic stimulus policy.”

Of course, Korea has strengths unique to the country. The foreign exchange rate, which fluctuated by dozens of won a day last year, has significantly stabilized. Corporate performance is also improving much faster in Korea than in other countries.

A more stable won provides the basis for foreigners to buy Korean stocks without risking foreign exchange losses.

Many experts say the stock purchase binge by foreigners is a process to compensate for their overselling of domestic stocks. The foreign share of the KOSPI once exceeded 44 percent in 2004, but fell to 28 percent late last month.

Experts have mixed views on whether the situation constitutes a change in the overall trend. While opinions are divided over whether the global economy has entered a recovery phase, foreigners can sell off and escape from the Korean stock at anytime.

Researcher Bae Min-geun at LG Economic Research Institute said, “Unless Korean companies continue to emerge as global champions in the future, it is premature to conclude that foreigners have shifted course to ‘Buy Korea,’ considering that the Korean economy cannot sustain speedy growth as it did in the past.”

jarrett@donga.com