Foreigners exit South Korean stocks for US bonds after 10% currency gains

Foreign investors have shifted capital from the KOSPI into US short-term bonds following a 10% currency gain as the Korean won strengthened from the 1,500 won level to 1,350 won. This outflow occurred as the index fell more than 15% over seven business days, including a single-day drop of over 7% last Thursday and Friday.

The KOSPI index has fallen more than 15% over seven business days amid heightened volatility in the South Korean stock market. Capital outflow accelerated particularly between last Thursday and Friday, when the index dropped more than 7% in a single day, with foreigners recording a net sell-off of over 4 trillion won. During the "Morning Economy Plus" broadcast on October 19, Woori Bank economist Choi Jin-ho identified the exit of foreign capital as the core reason behind the recent stock price adjustment.

Foreigners realize profits through US short-term bonds after securing 10% currency gains

Currency fluctuations provided the backdrop that allowed foreign investors to withdraw funds without significant burden while selling South Korean stocks. The Korean won strengthened as the KRW/USD exchange rate dropped from the 1,550 won range to the recent 1,330 won range, driven by the dollar-selling effects of exporters, such as the inflow of funds related to the listing of SK hynix's EDR since this past summer.

Economist Choi Jin-ho explained that for foreign investors, the environment was created to earn approximately 10% in profit from currency gains alone as the exchange rate fell from the 1,500 won level to the 1,350 won level. Consequently, when selling South Korean stocks, foreigners were able to realize both capital gains from stock prices and currency gains simultaneously. Analysis suggests these secured profits moved into relatively safe assets, such as US short-term bonds, to defend returns.

Price stability hindered by rising energy prices and service inflation pressure

Inflation trends in the United States are acting as a variable that will determine the direction of future monetary policy. Recently released US consumer prices recorded higher than expected due to rising energy prices. As oil prices exceeded 100 dollars per barrel due to geopolitical risks in the Middle East, the year-on-year increase in the energy sector surpassed 20%, driving up overall inflation.

Beyond energy prices, inflation in housing and transportation services is also a concern. As inflationary pressure derived from rising energy prices transfers to service prices, housing and transportation service costs—which exhibit strong downward rigidity—are rising together. With core service inflation already approaching 2%, there are outlooks that returning to the United States' inflation stability target of 2% will not be easy. Accordingly, the possibility that the Federal Reserve's interest rate hike cycle could resume must be kept in mind.

IMF economic outlook: High interest rate environment likely to persist amid slowing South Korean growth

According to the IMF economic outlook report, global economic growth rates next year are expected to vary by country. While the United States, Eurozone, and Japan are expected to show growth rates similar to or slightly higher than this year, South Korea's growth rate is expected to slow to 2.8% next year following 3.3% growth this year. However, considering South Korea's potential growth rate, the 2.8% figure is not considered a negative level.

Regarding inflation, after peaking this year due to the surge in oil prices, a trend of easing is expected next year alongside falling energy prices. However, inflation rates in major countries, including the United States and the Eurozone, are likely to remain higher than the 2% target of their respective central banks. Consequently, analysis suggests that the global high interest rate environment may persist through next year, potentially pressuring the stock market.

Source: original video (YouTube)