Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How Foreign Investors Are Fleeing Korean Stocks Despite Record Rally
Transcript
- Lucas: South Korea's Kospi just had its worst day in years — down seven percent. And if you look at the weekly numbers, the selloff has been brutal across Korean equities. Luna: Yeah, the EWY ETF, which tracks Korean stocks, dropped over nineteen percent in just five days. That's not a correction, that's a rout. Lucas: But here's the strange part. Korean stocks have actually had a record-breaking rally over the past year. So what we're seeing is a massive divergence: local retail investors piling in, foreign investors rushing for the exits. Luna: Foreign investors have dumped billions of dollars of Korean stocks this year. That's the headline this morning. Why are they leaving? Lucas: There are three structural reasons that I think explain it, and they're all connected to global trade finance. First, the yen carry trade unwind. When the yen strengthens, it squeezes positions funded in yen, and Korea is one of the biggest recipients of that carry trade flow. Luna: Right, because investors borrowed cheap yen to buy Korean assets. Now that the yen is firming, they have to unwind. That's a mechanical selling pressure. Lucas: Exactly. Second is China. Korea's export economy is deeply tied to Chinese demand — semiconductors, displays, batteries. And China's economic slowdown is hitting harder than expected. Korean exports to China dropped about twelve percent year-over-year in the latest monthly data. Luna: And third, the semiconductor cycle. Memory chips are Korea's biggest export, and the global chip cycle is turning down. Samsung and SK Hynix are facing pricing pressure. Lucas: So foreign investors see three headwinds at once. The Kospi's rally was largely driven by retail speculators — domestic day traders. They're buying the dip, but institutions are using it as an exit window. Luna: It's a classic divergence. And the won is weakening too — we're at 159 won to the dollar, near multi-year lows. That's another sign foreign capital is leaving. Lucas: A weaker won actually helps Korean exporters — makes their goods cheaper globally. But it also raises the cost of imported energy and raw materials. For a country that imports nearly all its oil, that's a real drag. Luna: So who's buying? You said retail investors are piling in. Are they just chasing the rally, or is there a strategic case? Lucas: A lot of it is momentum trading. Korean retail investors have been very active in derivatives, especially options. They've also been borrowing to invest — margin debt is at record levels. That's a risk if the selloff continues. Luna: But some analysts argue that Korean stocks are undervalued on a price to earnings basis. The Kospi's P/E is around 10, compared to the S&P 500 at 22. If you believe in the long-term story — the battery supply chain, the AI chip demand — it might be a contrarian buy. Lucas: That's the bull case. But the bear case is that the structural outflows have further to run. Foreign ownership of Korean stocks has fallen from about 34 percent to 28 percent over the past year. That's a massive shift. Luna: And it's not just Korea. Look at other emerging markets — the EEM ETF is down almost eight percent this week. There's a broader EM selloff. But Korea is getting hit hardest. Lucas: Because Korea sits at the intersection of so many global trade flows. It's a bellwether for the semiconductor cycle, for China demand, for the yen carry trade, for export competitiveness. When global trade gets complicated, Korea feels it first. Luna: If these conversations have moved your work forward in some small way — whether that's understanding a market move or making a better trade decision — there's a simple way to support the show. Lucas: Yeah, a couple of dollars a month is genuinely what keeps our podcast network ad-free. You can find us at buy me a coffee dot com slash fexingo. It's really that easy. Luna: It makes a real difference. And now back to Korea — so given all these headwinds, is there any sector that foreign investors are still buying? Lucas: Interestingly, yes. Foreign investors are still net buyers of Korean bonds. The bond market is seen as a safe haven for carry trades — you get a decent yield pick-up versus US Treasuries. But equities are a different story. Luna: So there's a flight to safety within Korea itself. Moving from stocks to bonds. Lucas: Exactly. And that tells you that foreign investors aren't abandoning Korea entirely. They're rotating into less risky assets. They still trust the sovereign credit; they just don't trust the corporate earnings outlook right now. Luna: What about the Korean won? If foreign investors are selling stocks but buying bonds, does that stabilize the currency? Lucas: It helps, but not enough to offset the equity outflows. The Bank of Korea has been intervening to support the won, but they can only do so much. The trade balance is still in surplus, which provides a floor, but capital flows dominate in the short term. Luna: And geopolitical risk is another factor. The Middle East tensions are spooking markets globally, and Korea is particularly exposed to oil price shocks. Lucas: Right. Iran and Israel exchanging strikes over the weekend has pushed oil prices higher. Korea imports all its oil, so higher crude costs mean a bigger trade deficit, a weaker won, and more inflation. It's a vicious cycle. Luna: So for an international business listener — supply chain manager, CFO, trade finance professional — what's the takeaway? Lucas: I think the key is to watch the won-dollar exchange rate and the Bank of Korea's policy response. If the won weakens past 1600, that could trigger more capital controls or emergency rate hikes. And if you're sourcing from Korea, you need to hedge your currency exposure now. Luna: Also keep an eye on the semiconductor export data. If memory chip prices stabilize, that could be the first sign of a turnaround. But until then, the rally in Korean stocks was built on shaky ground. Lucas: And the divergence between foreign and retail investors is a classic contrarian indicator. It doesn't mean the market is about to crash — but it does mean the smart money is voting with its feet. Luna: So the question is, are retail investors right this time, or are they catching a falling knife? Lucas: That's the billion-dollar question. For now, I'd say the weight of evidence points to more downside. But Korea has surprised before. It's a resilient economy with world-class companies. The question is whether those companies can navigate this trade storm. Luna: Well, we'll be watching the data closely. Thanks for joining us. Lucas: Thanks, Luna. Until next time.