The increase in the National Pension's target allocation for domestic stocks acted as a supply and demand factor that eased mechanical selling pressure in the rapidly rising Korean stock market. The photo shows the National Pension Service's Fund Management Center. [Photo = Yonhap News] The framing of the market's judgment this week is "resetting policy supply and demand."

The most significant news in the Korean stock market this week was not just the rally in U.S. tech stocks. The National Pension's increased target allocation for domestic stocks emerged as a variable that could bring about deeper changes in supply and demand.

The National Pension Fund Investment Committee's decision to raise the target allocation for domestic stocks from the current 14.9% to 20.8% is not a simple portfolio adjustment.

It is interpreted as a measure to alleviate concerns about mechanical selling that have loomed over the market following the rapid surge in the Korean stock market.

This week's Money Insight question is singular:

How much can the National Pension's increased target allocation support the downside of the Korean stock market rally?

The National Pension is the largest long-term investor in Korea. When stock prices surge while the target allocation is set low, the book value of existing stocks increases, naturally raising the proportion of domestic stocks.

In such cases, if the target allocation and its permissible range are exceeded, pension funds face pressure to sell stocks to adjust their holdings.

This was precisely what the market had been worried about. If the structure dictates that the National Pension must sell as the KOSPI rises, selling pressure will always be present at the ceiling of the rally.

Three structures were confirmed in the market this week.

First, the increase in the target allocation reduces mechanical selling pressure.

As the target allocation for domestic stocks increases, the permissible holding range expands even for the same book value. Holdings that needed to be reduced until yesterday may become maintainable holdings starting today. This is the core of this measure.

This does not mean the National Pension will immediately buy a large volume of stocks, but at the very least, the potential selling pressure that was suppressing the rapidly rising market is alleviated.

Second, policy supply and demand effectively re-accommodates the higher index level within institutional asset allocation.

When the Korean stock market experiences a rapid surge in a short period, the market always poses the same question: Can these prices be sustained? The National Pension's increased allocation serves as a signal to institutional long-term investors that they can accept a higher proportion of Korean stocks within their asset allocation range in response to this question.

This can also act as a psychological stabilization for foreign and individual investors.

Third, policy supply and demand is a positive factor, but it is not a panacea.

Although the Fund Committee decided to temporarily expand the permissible range for strategic asset allocation (SAA) in domestic stocks, the specific figures were not disclosed. They also implemented rule improvements, such as reducing the maximum daily rebalancing size.

This can be seen as a measure to reduce market impact, but the actual scale of reduced selling pressure needs to be confirmed through future pension fund trading and index movements.

Therefore, describing this measure as "the dissipation of pension fund selling pressure" would be an overstatement. A more accurate expression is "the mechanical selling pressure from pension funds has been alleviated."

The National Pension's actual trading will vary depending on the index level, asset allocation principles, overseas asset allocation, exchange rates, and risk management criteria.

Furthermore, during periods of rapid short-term gains, individual leverage, single-stock ETPs, and profit-taking volumes can amplify volatility. While policy supply and demand can provide downside support, the market's ultimate direction will ultimately be determined by corporate earnings and foreign investor flows.

Here is the conclusion of this week's Money Insight:

The National Pension's increased allocation to domestic stocks has altered the supply and demand conditions for the Korean stock market rally. It has moved from a phase of simple price increases to one where institutional supply and demand are to some extent accommodating those prices.

The viewing points for next week are threefold:

First, we need to confirm whether the actual net selling pressure from pension funds is decreasing.

Second, we need to observe whether foreign capital continues to buy large-cap stocks in conjunction with the National Pension variable.

Third, we need to assess whether expectations of policy supply and demand combine with expectations of earnings improvement, or whether they are simply being consumed by short-term overheating.

※This article is for reference analysis to aid in understanding the article and is not an investment recommendation. Actual markets and stock prices may vary depending on policy implementation, pension fund trading, foreign investor flows, corporate earnings, exchange rates, and volatility in leveraged products.