Foreign investors slow Korean stock buying on fears of U.S. Fed rate hike

[Photo by MK DB]

Foreign investors have slowed their purchases of shares on the benchmark KOSPI after the U.S. dollar rose on concerns the Federal Reserves will maintain its tightening policy.

Foreigners bought a net 49.1 billion won ($37.9 million) of shares of companies listed on KOSPI between Feb. 13 and 17, according to the Korea Exchange on Monday. Foreign investors had been big net-buyers earlier in the year, purchasing about 1.5 trillion won of stocks in the first week of January and some 3.3 trillion won in the last week of that month.

Market insiders see concern about the U.S. Federal Reserve’s move as the biggest cause of the shift in sentiment among foreign investors. There has been mounting concern that the U.S. Fed may maintain its tightening mode for a longer period as some recent economic data showed positive trends, while inflation still remained high.

Recent comments from the Fed following economic data have raised expectations that there could be further rate increases. On Thursday, the U.S. Bureau of Labor Statistics announced that producer price index for January was up 6 percent from a year ago, well above market estimate of 5.4 percent. Consumer price index for the same month rose 6.4 percent, above the market forecast of 6.2 percent.

Wall Street insiders are revising their forecasts that Fed rate could rise to 5.5 percent by the endof this year, from the previous 5.25 percent estimate. “Investors are avoiding risks after expectations of the Fed lowering the rate later this year has become less likely,” said an analyst at Daeshin Securities Co.

Fed tightening leads to higher market interest rates and decline in the stock market. This is particularly critical for markets in advanced economies, as global investors will seek to increase their dollar holdings to invest in U.S. bonds that offer higher interest. That in turn weakens the value of other currencies, prompting investors to sell their bonds and stocks in emerging economies. Indeed, stronger dollars has been back after about a month. On Friday, the won traded against the dollar at 1,299.5 won at the close, the lowest since 1,302.9 won seen on Dec. 19.

During the same week, foreign net sales were focused on companies that saw some growth in the market this year, following China’s reopening. Those investors sold 142.5 billion won of POSCO Holdings Inc. shares during the week. The steelmaker has seen a 22 percent increase in its stock this year, helped by expectations of higher steel demand and growth potential in its subsidiaries, including POSCO Chemical Co., as China reopens.

Foreign investors also sold shares of Korean tech companies that are believed to be interest rate-sensitive. Foreigner net sales of Kakao Corp. topped 61.3 billion won, the eighth highest. Their net sale of Kakao Bank Corp. and Naver Corp. were ninth and tent, worth some 59.6 billion won and 56.2 billion won, respectively.

There is no consistent forecast concerning foreign investors’ moves. Some see the selling trend to likely continue as the won may stay weak against the dollar.

“Many forecast that the central bank may not increase its policy rate this month and not go hand-in-hand with the U.S. Fed,” said an analyst at Shinhan Securities Co. “This would prompt foreign investors to sell government bond futures, leading to a weak won.”

Some see the recent selling trend as only temporary and that they will return when the effects from China’s reopening become noticeable as a robust Chinese economy often leads to better investor sentiment for Korean companies.