Why foreign investors are selling

Foreign investors have dumped billions of dollars worth of South Korean stocks this year, despite the Kospi being one of the world’s best performers so far with record year-to-date gains.

On Monday, investors abroad had unloaded a net. 1.24 trillion won Shares listed on Kospi are worth (about $801 million) as of 11 a.m. Singapore time (11 p.m. ET Sunday), according to Korea Exchange data.

“Foreign investors continued to sell the Kospi market, driven by outflows into Kospi Tech and Auto.” Goldman Sachs analysts wrote in a June 5 note.

kospi It dropped more than 8 percent at the opening.

But many investors and strategists say the foreign selloff has less to do with deteriorating fundamentals and more to do with the success of the market itself.

“This is actually the forced selling that we are seeing from our investors and customers,” said Chetan Seth. nomuraAsia-Pacific equity strategist.

As Korean stocks rose, their weights in global and emerging market benchmarks also increased sharply, forcing many active fund managers to reduce positions to stay within portfolio and risk limits, investors told CNBC.

Selling pressure has been evident for months. Goldman estimates net foreign outflow from Kospi reached about $62 billion as of the end of May.

According to Nomura, this incident reflects what has happened in India in recent years; here, increasing domestic retail participation is increasingly crowding out foreign investors.

“I think the same dynamic could play out in Korea,” Seth added, noting that foreign investors could expect better entry points after the pullback.

Nick Wilcox, head of Asian equities at Man Group, echoed this view, noting that Korea’s rapid rise in emerging market indices was creating structural pressures for international investors.

He added that some investors are also opposing regulatory restrictions on how much of individual companies they can own, following a rally in Korea’s biggest stocks.

“Most sales are forced sales because investors face active limits.”

However, foreign sales were more than offset by a wave of domestic purchases.

“The outflow from foreigners has been more than offset by domestic investors,” Wilcox said, pointing to an estimated $70 billion in retail inflows this year and a sharp increase in brokerage account openings.

The selloff also reflects growing concerns about risk concentration as the Korean boom becomes increasingly reliant on Samsung Electronics and SK Hynix.

However, despite the dumping, market veterans argued that the fundamentals of Korean stocks remained solid.

“I can’t perceive that investors have a negative view of Korea from foreign investors, right? So… right now I think it’s mechanical,” Nomura’s Seth said.

Similarly, Goldman Sachs maintained its optimism regarding Korean stocks and continued its rise. The 12-month Kospi is targeting 12,000 and predicts another 37% rise in its note published Friday.