On Monday, volatility in the South Korean stock market surged to near record-high levels.
This followed foreign investors selling off South Korean stocks worth $13.2 billion last week.
However, Citi and Goldman Sachs believe that the upward trend in South Korean stocks could still continue.
On Monday, volatility in the South Korean stock market surged to near record levels, triggering significant fluctuations in the Kospi index and prompting the exchange to briefly impose trading curbs. This followed foreign investors selling $13.2 billion worth of South Korean equities last week.
The Kospi index fell by as much as 4% during early trading on Monday, extending a 6% plunge from last Friday. Goldman Sachs described the index's drop last Friday as 'wiping out weekly gains amid a large-scale outflow of foreign capital.'
The Kospi Volatility Index rose 2.56% on Monday, nearing its peak level reached in early March.
However, driven by leading stocks such as Samsung Electronics, the Kospi index reversed losses during Monday’s session and ultimately closed up 0.31% at 7516.04 points.
In related news, a South Korean court today approved a partial injunction request filed by Samsung Electronics, mandating that labor union strikes must not impact production. The South Korean court also ruled that if Samsung Electronics’ labor union in South Korea fails to comply with the court order, it will face fines of approximately 100 million won per day.
Foreign investors sold $13.2 billion worth of South Korean stocks last week.
According to data from Goldman Sachs, foreign investors withdrew approximately $17 billion from emerging markets in Asia excluding China last week, marking the second-largest single-week outflow on record. Of this, South Korea accounted for the majority, with an outflow totaling $13.2 billion.
Due to sharp declines in stock index futures triggering so-called ‘circuit breaker mechanisms’ designed to stabilize market fluctuations, the Korea Exchange briefly suspended some algorithmic trading on Monday. After the KOSPI 200 futures dropped by 5%, the Korea Exchange activated the KOSPI circuit breaker mechanism, halting algorithmic trading for five minutes.
Before this round of market reversal, the Kospi index surpassed the 8000-point mark for the first time last week, driven by AI-related stocks, chip manufacturers, and retail investor enthusiasm.
The Korean stock market rally is expected to continue.
Underpinned by a strong wave of AI chip enthusiasm, South Korea's stock market has surged impressively, with year-to-date gains reaching over 80%, far outpacing other major global markets.
Citi strategists noted that the Korean stock market now appears 'significantly more overbought than the U.S. market,' prompting the bank to reduce its exposure to bullish positions on Korea.
"Although we believe it is too early for a severe market correction or the end of the bull market due to tightening financial conditions caused by interest rate factors, the Kospi appears significantly more overbought compared to the U.S. market. A prudent approach would be to take profits on half of the positions," wrote Citi strategists.
Citi pointed out that the 'irrational exuberance' of South Korean domestic retail investors has shown more warning signs. Retail investors have become key buyers in the Korean stock market this year, frequently entering through margin trading and leveraged exchange-traded funds (ETFs).
Citi stated that while this does not mean the Kospi's rally has ended, 'it does imply that risks have risen.'
These remarks underscore growing concerns that surging global bond yields and geopolitical tensions are starting to weigh on some of Asia's best-performing stock markets.
Citi noted a 'breakout in long-term yields globally,' as Japanese government bond yields and UK gilt yields both surged significantly due to concerns about persistent inflation and rising oil prices linked to conflicts with Iran.
Nevertheless, both Citi and Goldman Sachs believe that the Korean stock market rally could continue. Goldman Sachs estimated that Korean retail investors bought $14.1 billion worth of stocks last week.
Citi stated that the bank is taking profits on half of its trading positions in Korea—not a complete exit—as it expects the Korean market to be one of the biggest beneficiaries of passive fund inflows resulting from the upcoming rebalancing by index provider MSCI.
Editor/melody