Foreign exodus from Korea? More rebalancing than retreat: analysts

Offshore investors’ heavy selling of South Korean equities this year appears to be driven more by portfolio rebalancing than a fundamental shift in sentiment, analysts said.

While foreign investors have offloaded a net 50.76 trillion won ($34.2 billion) worth of shares so far this year through Friday, analysts point to rebalancing of Korea’s portfolio weighting as the key driver.

“Korea’s recent equity outperformance may have pushed its weighting within global pension and sovereign wealth fund portfolios to the upper bounds of their strategic allocations, triggering selling for rebalancing,” Korea Investment & Securities analyst Yeom Dong-chan said.

The offshore sell-off began in February, when the benchmark Kospi was near the peak of its rally, with 19.86 trillion won in net sales that month, followed by 35.71 trillion won in March, Korea Exchange data showed.

Considering the benchmark Kospi was nearly at the peak of its blistering rally in February, Yeom said the selling appears to be largely driven by portfolio construction rules among institutional investors such as pension funds and sovereign wealth funds.

Countries with significant sovereign wealth or pension exposure — including Canada, the Netherlands, Singapore and Saudi Arabia — have been among the top sellers of Korean equities this year, he added.

Data from the Financial Supervisory Service showed the Netherlands sold a net 954 billion won worth of Korean shares in February, while Singapore and Canada posted net sales of 1.38 trillion won and 1.52 trillion won, respectively, in the same period.

"Foreign investors’ net short positions in futures stopped increasing in mid-February, which could signal improving conditions for spot inflows," he added, referring to how index futures positioning often leads spot flows, offering hints at future direction.

KB Securities analyst Lee Eun-taek offered a similar view, saying recent foreign selling reflects portfolio rebalancing rather than a shift to a bearish outlook on the local market.

“Foreign investors had been heavily concentrated in semiconductor and auto stocks. As share prices in these sectors surged, they were effectively forced to rebalance to avoid excessive concentration,” Lee said.

Despite the heavy sell-off, foreign ownership of the benchmark Kospi has held above 37 percent, near a six-year high, indicating continued net buying in other sectors, he said. It stood at 37.33 percent as of Friday.

Lee, however, added that foreign investors may still be overweight Korean equities, leaving room for further rebalancing-driven selling.