Foreign investors are dumping Kospi shares, but experts aren't worried

A screen in Hana Bank's trading room in central Seoul shows the Kospi closing at 7815.59 points on May 21, up 606.64 points, or 8.42 percent, from the previous trading session. [YONHAP]

Foreign investors have launched a record-level selling spree in the Korean stock market this year, yet their ownership ratio in the Kospi has approached an all-time high as soaring AI chip stocks such as Samsung Electronics and SK hynix rapidly inflate the market’s overall capitalization.

Foreign ownership in the Kospi stood at 39.43 percent as of Wednesday, the Korea Exchange said on Thursday. Despite foreign investors posting cumulative net sales of more than 94 trillion won ($62.4 billion) this year, their share of total market capitalization has actually risen from 36.67 percent at the beginning of the year.

The trend contrasts sharply with the Covid-19 market crash in March 2020, when foreign investors sold a net 44 trillion won and their ownership ratio fell from 37.7 percent to 31.4 percent.

Foreign investors sold a net 219.6 billion won on the benchmark bourse on Thursday, extending their net-selling streak to 11 consecutive trading sessions this month. Cumulative net sales during the period reached 44.64 trillion won.

Market experts, however, view the trend not as a broad withdrawal from Korea but as portfolio rebalancing.

“If foreign investors had simply tried to maintain the ownership ratio seen at the beginning of the year at 36 percent, net selling would have needed to reach around 230 trillion won,” said Lee Kyung-soo, an analyst at Hana Securities.

A person holds a tablet showing a financial chart and points at it with a pen. A laptop in the background displays stock market graphs, while printed financial documents rest on the desk. [SHUTTERSTOCK]

In particular, semiconductor stocks with high levels of foreign ownership, including Samsung Electronics and SK hynix, saw the value of foreign holdings surge unusually fast as their share prices soared.

The trend suggests many foreign investors have been taking partial profits in rapidly rising semiconductor shares as part of mechanical portfolio rebalancing to maintain target ownership ratios.

Much of the foreign capital invested in the Korean stock market comes from institutional investors such as global asset managers, hedge funds and actively managed exchange-traded funds. These institutional investors establish global asset allocation strategies and periodically rebalance their holdings accordingly.

Shuli Ren, a Bloomberg Opinion columnist covering Asian markets, viewed foreign selling as more of a portfolio rebalancing than a bet against Korean equities in a Bloomberg article published on Wednesday.

The logo of investment research firm Morgan Stanley Capital International [REUTERS]

The trend also coincides with Korea’s increased weighting in the MSCI Emerging Markets Index. Investment research firm Morgan Stanley Capital International (MSCI) recently raised Korea’s weighting in its emerging markets index from 15.4 percent to 21.7 percent in its May quarterly review, nearly closing the gap with China’s 22 percent weighting.

The increase means global funds tracking the benchmark index are required to hold more Korean equities, making it more difficult for investors to significantly reduce their exposure to the Korean market.

“The MSCI mechanically adjusts country weightings according to changes in market capitalization,” said Seo Sang-young, an analyst at Mirae Asset Securities.

Brokerages expect at least 1.4 trillion won in inflows from index funds and other passive funds tracking MSCI indexes as a result.

Still, concerns are mounting over extreme concentration in a small number of shares.

Samsung Electronics flag, left, and SK hynix's Icheon headquarters in Gyeonggi [YONHAP]

"Samsung and [SK] hynix now have a combined market value of roughly $2 trillion — greater than Korea’s GDP of $1.93 trillion, according to [International Monetary Fund] estimates," wrote the Financial Times on Wednesday.

The two companies now account for roughly 48 to 49 percent of the Kospi’s total market capitalization — more than double their combined share of around 23 percent at the end of 2024.

As the two companies’ share prices continue to rise, the likelihood of foreign investors repeatedly engaging in profit-taking increases.

Analysts warn that the broader Kospi could become increasingly volatile as market movements grow more dependent on a handful of semiconductor giants.

The AI market is increasingly being driven by a small number of winner-take-all companies, undermining the foundations of traditional diversification theory, Bloomberg's Ren wrote, adding that diversification can lead to weaker returns while concentrated investments carry greater risks.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.