Where the Momentum Is Building

The capital flow dynamics in South Korea's stock market are showing a tangible turnaround. Foreign investors set a new all-time high for daily net purchases, while selling pressure from domestic institutions has significantly eased. Combined with tighter regulations on leveraged ETFs, these factors are collectively pointing towards a marginal improvement in KOSPI market volatility.

Record Foreign Inflow Marks a Reversal

On July 31, foreign investors made a net purchase of approximately 7.2 trillion won in KOSPI stocks, the highest single-day net buying figure ever recorded. According to a report from Citi Research analyst Jin-Wook Kim, this number represents a fundamental reversal of the large-scale foreign net selling trend that persisted for several months. Citi Research maintains its KOSPI year-end target of 10,000 points and believes the headwinds from capital flows are further dissipating.

Monthly Selling Shrinks as Institutions Shift

At the market level, the monthly net selling by foreign investors in July narrowed sharply to 9.8 trillion won, down from 48.4 trillion won in June and 44.5 trillion won in May. Meanwhile, domestic pension funds and institutional investors turned net buyers of KOSPI stocks in July, purchasing 1.0 trillion won, after net selling 2.2 trillion won and 2.4 trillion won in May and June, respectively. Citi believes the headwinds facing the South Korean stock market from capital flows have clearly weakened, while tailwinds from fundamentals and policy are building.

Regulatory Tightening on Leveraged ETFs Aims to Stabilize Volatility

The Financial Services Commission (FSC) tightened access for retail investors to single-stock leveraged ETFs on July 31, a move expected to curb overall KOSPI market volatility. The minimum margin requirement for retail investors participating in these instruments was raised from 10 million won (in a mix of stocks and cash) to 30 million won (in cash only). The effect was immediate, with trading volumes in major single-stock leveraged ETFs falling to about 50% of their monthly average following the rule's implementation, according to a Yonhap news report on July 31. Citi believes the reduced participation in high-volatility tools will help smooth short-term swings in the KOSPI and provide a more stable trading environment.

National Pension Rebalancing Concerns Fade

Market worries about potential selling pressure from the National Pension Service (NPS) rebalancing have eased, as July data showed a quiet shift in institutional flows. South Korean pension funds and institutional investors collectively net purchased 1.0 trillion won in KOSPI stocks in July, a stark contrast to net selling of 2.2 trillion won in May and 2.4 trillion won in June. Citi Research noted that when the KOSPI was near the 6,500-point level, the NPS's domestic equity allocation had fallen to 24.2%, down from 29.4% in May. Citi believes the NPS is likely to maintain an overweight position in domestic stocks for an extended period, potentially with an allocation ceiling of up to 28.8% or higher, as a significant reduction could trigger public backlash.

10,000 Point Target Maintained with Policy Support in View

Against this backdrop of multiple positive signals, Citi Research maintains its KOSPI year-end target of 10,000 points, citing several supportive factors. The fundamentals of the memory chip sector remain solid, and the KOSPI's current valuation is at historically low levels, providing core support. Additionally, South Korea's strong economic fundamentals and a favorable policy mix are creating new upward momentum. Notably, Citi pointed out that the South Korean financial authorities may provide liquidity support if needed, including setting up market stabilization funds, offering a degree of policy floor for the market. As the headwinds from capital flows continue to fade, Citi expects the combined effect of these fundamental and policy factors to become increasingly apparent.