(Yonhap)
South Korea’s National Pension Service (NPS) is facing mounting pressure to sell its domestic stock holdings despite returns topping 16 percent this year, as their weight has moved beyond target levels.
According to industry sources on Wednesday, the NPS, the country’s largest institutional investor accounting for about 7 percent of the domestic stock market’s entire market capitalization, is under pressure to carry out forced sales worth roughly 150 trillion won ($100.7 billion).
The pressure comes after its domestic stock exposure exceeded the target range by as much as 12 percentage points amid a market rally. Although rebalancing is suspended, a restart would require it to sell stocks over 12 months, including holdings in Samsung Electronics Co. and SK hynix Inc.
To avoid mechanical selling, sources noted that the NPS would need either to raise its target allocation for domestic stocks this year or widen the allowable deviation band. The current framework combines a strategic asset allocation (SAA) band of plus or minus 3 percentage points and a tactical asset allocation (TAA) band of plus or minus 2 percentage points for exceptional circumstances, for a total tolerance range of plus or minus 5 percentage points.
However, expectations are divided on whether the NPS should raise its domestic equity target, as critics could argue that the government is effectively using the pension fund to support the stock market.
Recent bullish calls from global investment banks on Korean stocks have added support for a potential increase in domestic allocation.
JPMorgan Chase & Co. said Wednesday the benchmark Kospi could reach 10,000 in an optimistic scenario, citing improving corporate earnings and ongoing corporate governance reforms. Earlier, Goldman Sachs Group Inc. set a target of 9,000. The banks argue the recent strength in Korean stocks reflects structural improvements in fundamentals rather than speculative trading.
Some market participants argue the NPS should avoid large-scale selling.
“Global banks view Korean stocks as undergoing a re-rating, with discount rates narrowing even beyond the semiconductor sector,” said an industry expert.
Japan’s Government Pension Investment Fund (GPIF) is often cited as a precedent for benefiting from a domestic market re-rating. In 2014, during the early phase of Japan’s capital market value-up initiatives, GPIF raised its domestic equity allocation from 12 percent to 25 percent, significantly boosting returns.
“While Korean stocks have underperformed global markets over the past two decades, historical data may be less relevant if the domestic market is entering a structural shift,” said an official from a fund operation committee.
The key concern is that a sharp increase in the domestic stock target could prompt criticism that the government is exerting undue influence over the pension fund.
Expanding the permissible deviation range has emerged as an alternative to prevent mechanical selling without materially raising the target allocation.
The NPS faced similar rebalancing pressure in 2021, when the Kospi broke above the 3,000 level for the first time, triggering repeated mechanical sales.
At the time, the fund operation committee kept the target allocation unchanged but widened the SAA deviation band. The TAA deviation band, which had not been actively used, was reduced by an equivalent amount, effectively preserving the overall risk framework.
Recent market volatility is now being cited as a rationale for further widening the deviation range.
Sidecar trading curbs designed to dampen volatility have been triggered 15 times this year on the benchmark stock market, the highest annual level since 2008, when they were triggered 26 times during the global financial crisis.
Supporters of a wider band argue it would reduce unnecessary transaction costs driven by mechanical trading. Others also say that if the NPS raises its domestic equity target, the deviation limits should be adjusted accordingly.
Later this month, the Ministry of Health and Welfare is scheduled to finalize the medium-term asset allocation plan through 2031. Ahead of the committee meeting, fund managers are holding seminars with securities industry experts to collect input.
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