Analysis of the causes of net selling by foreign investors: Profit taking and structural issues intertwined

In the first half of this year, there were successive reports of victory that the cumulative current account surplus and semiconductor exports had reached record highs. However, at the peak of the festival, foreign investors sold a large number of stocks, causing the KOSPI to slip just before reaching the 10,000 mark. Single-stock leveraged exchange-traded funds (ETFs), which appeared in the process of increasing volatility, were the target of arrows, but the cause of the KOSPI's nearly 30% adjustment from the 9,000 range to the 6,000 range last June was actually the outflow of foreign funds.

Foreigners made significant profits in the domestic stock market. There were rumors going around in the stock market that foreigners had earned hundreds of trillions of won. Net selling by foreigners on KOSPI this year amounted to 200 trillion won, and a significant amount of this is estimated to be profit. During this period, domestic individuals and institutions made net purchases of nearly 170 trillion won, accepting stocks offered by foreigners.

Why do foreigners always make short-term profits in the domestic stock market and then leave? For this reason, the volatility of the won/dollar exchange rate and the interest rate reversal with the United States will come to mind first. The purpose may have been to protect against the risk of foreign exchange losses due to the weakening won, but is it really just a matter of the exchange rate? It makes me think about the long-standing structural flaws in our capital market.

The large-scale net selling by foreigners goes beyond short-term profit-taking and is analyzed to be the result of changes in the macroeconomic environment, portfolio rebalancing, and adjustment of investment expectations for key companies. In particular, it is believed that the starting point of the foreign selling trend was that global funds, which achieved returns through investment in semiconductors that led the bull market, began adjusting their proportions (profit taking).

Typically, foreign funds adjust their portfolios for risk management when the proportion of a specific country or sector becomes excessively large. When these funds mechanically reduce their proportions, a large number of items for sale appear on the market.

It is similar in this bull market. As the stock market saying goes, ‘buy on rumor, sell on the news,’ foreign investors who react sensitively to leading economic indicators began selling in advance to reflect the possibility of a slowdown in profit momentum in the future as concerns were raised about a ‘peakout’ that the artificial intelligence (AI) and semiconductor industry cycles may peak and slow down. Mass selling of futures by foreigners increased the scale of spot selling, and as institutions and individuals were unable to sufficiently absorb the volume sold by foreigners, the imbalance between supply and demand worsened, leading to a further decline in the index.

In summary, foreign selling in KOSPI was triggered by profit-taking upon reaching the target rate of return, and led to a structural departure worth hundreds of trillions of won due to concerns about passing the peak performance and reduction in proportion due to global asset allocation.

In fact, from the perspective of foreigners such as global investment funds, the Korean stock market is not yet an investment destination where they can stay for a long time and grow together.

This can be easily seen by looking into the inner workings of our stock market. The domestic stock market has an abnormal structure that is concentrated in a few economically sensitive industries. As the warning that the semiconductor cycle is passing its peak has been raised, it can be seen that global funds have cashed in on Korean stocks with excellent liquidity in order to adjust their proportions.

Regressive corporate governance and poor shareholder returns are factors that reduce investment attractiveness. Corporations that are stock corporations are hoarding cash in their coffers, so the fruits of profits do not fully go to general shareholders.

In a market where small dividends, formal shareholder returns without cancellation of treasury stock, split listings of valuable business divisions, or opaque mergers for the benefit of the major shareholder family are repeated, 'long-term holding' is not a virtue, but can be a risk of incurring losses.

In a market where the compound interest effect cannot be enjoyed through dividends and treasury stock cancellation, short-term trading to take profits may be a reasonable choice.

This vicious cycle cannot be broken simply with stock market stimulus relief, temporary stimulus measures, or fine-tuning of the exchange rate.

Unless the board of directors' duty of loyalty to shareholders is strengthened, governance structure is improved, and a strong shareholder return system at the level of developed countries is not established, foreigners will leave without receiving only a banquet in the next cycle. Improving one’s constitution must come first. Improving the stock market's structure is only possible when authorities, companies, and investors all work together. Rather than being swayed by the waves of short-term exchange rates and cycles, patiently pursuing changes in corporate fundamentals and fundamental governance structure will determine the final winner.