This illustrates the movement of global capital centered around Korea. It depicts the structure that determines the inflow and outflow of foreign capital, with the fluctuations of the dollar, won, and overseas stock markets intertwined. [Image=Hanmiilbo]

Foreign Investor Return Limited Without Won Stability

Last week's key checkpoints for fund flows were how significantly the sharp decline in U.S. semiconductor stocks impacted Korean assets, whether Korean Exchange Traded Funds (ETFs) in overseas markets rebounded before domestic stocks, and whether the stabilization of the won would lead to a recovery in foreign investor demand.

The EEM (iShares MSCI Emerging Markets ETF), an emerging markets ETF listed in the U.S., rose from $64.59 on June 8th to $67.50 on June 12th. During the same period, the EWY (iShares MSCI South Korea ETF), a Korean ETF listed overseas, rebounded much more strongly, from $175.19 to $198.94.

However, these figures alone do not allow us to conclude that foreign capital has structurally returned to the Korean market.

The EWY plummeted by 14.11% on June 8th alone, only to surge by 11.48% on June 12th. KOSPI 200 futures also saw repeated declines and gains in the 8% range. This indicates that Korean assets did not outperform the emerging market average; rather, both the magnitude of declines and rebounds were larger.

This is related to the structural characteristics of the Korean stock market. Due to the high weight of large-cap semiconductor stocks, including Samsung Electronics and SK Hynix, in the index, changes in the U.S. Philadelphia Semiconductor Index and Nasdaq are amplified and transmitted to the Korean market.

When U.S. semiconductor stocks fall sharply, overseas investors quickly reduce their holdings in the Korean market through EWY. Conversely, when U.S. semiconductor stocks rebound, they begin buying EWY and KOSPI 200 futures again. This signifies that the Korean market is excessively dependent on semiconductors and foreign investor flows.

What truly determines the actual return of foreign investors are U.S. interest rates and exchange rates.

As U.S. Treasury yields rise, the returns on relatively safe dollar assets increase. This reduces the incentive for foreign investors to hold risky Korean stocks. Furthermore, if the won also weakens, even if stock prices rise, the returns in dollar terms will decrease.

While a weaker won may have some positive impact on the export performance of Samsung Electronics and SK Hynix, it is not necessarily a positive factor for stock prices. Even if the won-denominated amount of dollar sales increases, short-term stock prices can fall if foreign investors sell shares due to concerns about exchange rate losses.

Therefore, it is important to distinguish between moderate won depreciation and sharp won depreciation. While a mild depreciation of the won can be beneficial for the performance of exporting companies, situations where the won-dollar exchange rate soars into the mid-1500s are closer to signals of foreign investor outflow and financial market instability.

The conclusion of this week's Capital Rotation Radar is that interest in Korean assets remains, but confidence has not yet been restored. The rapid rebound of EWY and KOSPI 200 futures is largely characterized by bargain hunting and technical recovery.

For foreign investors to be considered to have structurally returned to the Korean market, U.S. 10-year Treasury yields must stabilize, the won-dollar exchange rate must fall below 1500, and continuous buying of large-cap semiconductor stocks must occur.

Next Week's Checkpoints

We need to monitor whether EWY continues to show a stronger trend than EEM, whether the won-dollar exchange rate falls below 1500, and whether foreign capital flows spread from Samsung Electronics and SK Hynix to sectors such as automobiles, finance, and industrials.