The Kospi and other indexes are displayed on a board at Hana Bank's dealing room in Jung-gu, Seoul, on Monday. The Kospi closed down 676.18 points, or 8.29 percent, at 7,484.41, while the Kosdaq fell 91.05 points, or 9.08 percent, to finish at 911.39. [Yonhap]
The Kospi and other indexes are displayed on a board at Hana Bank's dealing room in Jung-gu, Seoul, on Monday. The Kospi closed down 676.18 points, or 8.29 percent, at 7,484.41, while the Kosdaq fell 91.05 points, or 9.08 percent, to finish at 911.39. [Yonhap]

Even as Seoul's brokerage community forecasts a "Kospi 10,000 era," foreign investors have continued to offload Korean shares in trillion-won quantities day after day. Analysts largely attribute the selling not to deteriorating fundamentals but to a structural rebalancing — mechanical selling driven by Korea's rapidly expanded weight in global benchmarks.

Foreign investors net sold roughly 1.24 trillion won (about $804 million) worth of shares on the Kospi as of noon Monday, according to the Korea Exchange and CNBC. The index had plunged more than 8 percent immediately after the open.

The selling pressure has persisted since last month. Net foreign outflows from the Kospi reached approximately $62 billion (about 95 trillion won) through the end of May, according to Goldman Sachs.

In a recent report, Goldman Sachs said foreign investors have continued to sell technology and auto stocks, sustaining the outflow from Korean equities.

Global strategists, however, increasingly view the "sell Korea" trend as a structural consequence of the index's surge rather than a sign of weakening fundamentals. "Investors and clients are being forced to sell," said Chetan Seth, Asia-Pacific equity strategist at Nomura Securities.

As Korean stocks have surged, the country's weighting in global and emerging-market benchmarks has risen sharply, prompting many active fund managers to trim their holdings to stay within risk limits and portfolio guidelines.

The domestic market recently broke through the Kospi 8000 level in record time, and its market capitalization surpassed 7,000 trillion won, placing South Korea seventh in the world.

Nick Wilcox, head of Asian equities at Man Group, said Korea's rapid rise within emerging-market indexes is creating structural pressure on overseas investors.

He said investors are running into individual stock holding limits, adding that "a lot of the selling is forced selling where investors are hitting their buy limits."

The shares offloaded by foreign investors are largely being absorbed by domestic retail investors. Wilcox said foreign outflows have been "significantly offset" by inflows from local investors, with retail investor inflows reaching roughly $70 billion this year.

Despite the foreign selling, experts say Korean market fundamentals remain solid. Nomura's Seth said he does not get the sense that foreign investors hold a negative view of Korea. "I think it's mechanical at this point," he said.

Goldman Sachs also maintained a bullish outlook on Korean equities in its recent report, raising its 12-month Kospi target to 12,000 and projecting further upside of 37 percent.


bbo@heraldcorp.com