S Korean financial market hit by foreign capital exodus amid euro crisis

Special Report: Global Financial Crisis

by Na, Haejung

SEOUL, May 24 (Xinhua) -- Joining global financial markets recently going through harsh turbulence on the eurozone fiscal debt crisis, the South Korean main index KOSPI is also dipping at a steep pace, ending at 1,604.93 on Monday.

Behind the massive decline lie foreign investors who switched to net sellers in May, withdrawing capital from the local market by the largest amount on record.

Foreign investors, fleeing not only from the South Korean market but also from other emerging markets, are pulling down the KOSPI and the local currency at the same time as they worry over a possible spread of the debt problem.

RECORD-AMOUNT FOREIGN SELLING

Throughout May, foreign investors cashed out as much as some 5 trillion won (4.18 billion U.S. dollars) worth of local shares.

On May 7 alone, foreigners sold 1.24 trillion won (1.03 billion U.S. dollars) worth of shares, which was the highest selling by overseas investors in the history of Seoul's main bourse.

The May selling took up almost 43 percent of the foreign net purchase amount marked for the first four months of 2010, South Korea's daily Hankyung said.

Considering its heavy reliance on foreign capital, its exit en masse will likely continue to shake the local financial market.

According to local analysts, foreign capital exodus came as foreign investors sought to secure liquidity amid the snowballing debt problem.

As part of the plan, foreign investors turned to risk-free assets, resulting in a surge in both the U.S. dollar and the gold price in global markets.

Moreover, investor moves called on financial companies to secure margin calls to tackle the possible liquidity shortage, which made them withdraw additional investments from emerging markets.

"If global financial markets move into a downturn, emerging markets, such as South Korea, likely become the first place to see strong foreign selling due to their brisk liquidity conditions and high volatility,"a local analyst told Hankyung.

As a result, local shares hit as low as 1,600 on the back of foreign selling, free falling from 1,752 in late April, while the local currency kept its downward trend to 1,200 won.

Despite South Korea's recent recovery moves and corporate earnings surprises, external shocks seem to weigh on foreign investor sentiment than favorable factors within the domestic mark


S KOREAN BOURSE AT STAKE

Amid the deepening crisis in Europe, the South Korean stock market is remaining sluggish.

What makes the matter worse is South Korea's high exposure to global capital move, with foreign holding in South Korea's main bourse taking up 31.8 percent of total shares on market as of mid- May.

Of those shares held by foreigners, 16.3 percent, or 46 trillion won (38.3 billion U.S. dollars), belongs to European investors, escalating the risk when the eurozone crisis spread to other regions in series.

Local analysts who are mostly forecasting foreign selling, although it may decrease in terms of volume, will not easily be shifted to a net buy move.

"Without a substantial resolution of the debt problem in Europe, foreign investors are unlikely to switch their positions to net sellers again in local markets," said Ahn Seung-won, executive director at UBS Securities.

Park Yeon-chae, chief of Kiwoom Securities Research Center, also said that foreign selling trend would continue for a while as the eurozone fiscal debt problem is expected to linger for the long term.

Also, the geopolitical risks on Korean Peninsula, triggered by the sunken ship in the West Sea, are adding to the foreign capital flight as well.

The deepening foreign investment exodus calls on the local financial authorities to brace themselves for further capital withdrawal.

The financial regulator, on increasing sales by foreigners, tried to calm the turmoil by vowing to closely monitor the market, or even step into the market when necessary.

However, analysts and media together point to the fundamental of South Korean financial markets as the ultimate solution, urging local institutions and asset managers to increase the portion of long-term investment.

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