Single-day net inflow of 7.2 trillion South Korean won: Foreign investors set record on Friday! Wall Street: Headwinds in Korean equity capital flows have dissipated

The capital flow situation in the South Korean stock market is undergoing a substantive turnaround. The scale of single-day net purchases by foreign investors has hit a new historical record, while selling pressure from domestic institutions has significantly eased. Coupled with tighter regulatory access for leveraged ETFs, these multiple factors point to a marginal improvement in KOSPI market volatility.

On July 31, foreign investors' single-day net purchase of KOSPI stocks amounted to approximately 7.2 trillion South Korean won, setting the highest single-day net purchase record in history. According to Zhuifeng Trading Desk, a report by Jin-Wook Kim, an analyst at Citi Research, indicates that this figure marks a fundamental reversal of the large-scale net outflow trend by foreign investors that had persisted for several months. Citi Research currently maintains its KOSPI target at 10,000 points and believes that headwinds from capital flows are further dissipating.

In terms of market impact, the monthly net sales volume by foreign investors narrowed significantly to 9.8 trillion South Korean won in July, compared to net sales of 48.4 trillion and 44.5 trillion South Korean won in June and May, respectively. Meanwhile, domestic pension funds and mutual funds switched to a net purchase of 1.0 trillion South Korean won worth of KOSPI stocks in July, after net sales of 2.2 trillion and 2.4 trillion South Korean won in May and June, respectively. Citi believes that headwinds in the capital flow situation of the South Korean stock market have clearly weakened, while tailwinds from fundamentals and policy are gathering strength.

Record net purchases by foreign investors, significant narrowing of monthly selling

The scale of the return of foreign capital is unprecedented in historical data. The single-day net purchase of 7.2 trillion South Korean won on July 31 far exceeded any previous daily records, marking a significant shift in foreign investors' attitude toward the KOSPI.

According to the Citi research report, this round of KOSPI adjustment was mainly driven by rebalancing operations and profit-taking by foreign investors. However, since mid-July, the pace of capital inflows into the KOSPI market and overseas KOSPI-related passive ETFs has accelerated significantly, a trend that was further strengthened at the end of the month.

From a monthly perspective, the scale of net sales by foreign investors narrowed to 9.8 trillion South Korean won in July, a significant decrease compared to previous periods—net sales in June and May reached as high as 48.4 trillion and 44.5 trillion South Korean won, respectively. This narrowing indicates that the selling pressure from foreign investors, which previously dominated the market downturn, has substantially alleviated, and momentum for buying on dips is accumulating.

Regulators tighten restrictions on single-stock leveraged ETFs, helping to dampen market volatility

The South Korean Financial Services Commission (FSC) officially tightened the threshold for retail investors to access single-stock leveraged ETFs starting July 31. The new regulations will have a dampening effect on the overall volatility of the KOSPI market.

Specifically, the minimum margin requirement for retail investors participating in single-stock leveraged ETFs has been sharply increased from the previous 10 million South Korean won (combined stocks and cash) to 30 million South Korean won (cash only). The market effect was immediate after the implementation of the new rules—according to Yonhap News Agency on July 31, the trading volume of major single-stock leveraged ETFs dropped to about 50% of the monthly average after the new rules took effect. Meanwhile, the market capitalization of 16 single-stock leveraged ETFs also shrank noticeably.

Citi believes that the decline in retail participation in high-volatility instruments helps to dampen short-term fluctuations in the KOSPI market, providing a more stable operating environment.

Concerns over National Pension Service rebalancing fade, fund buying turns positive

The market previously had concerns about selling pressure potentially caused by rebalancing operations of the National Pension Service (NPS) of Korea, but actual data from July shows that institutional capital has quietly shifted direction.

South Korean pension funds and mutual funds collectively made net purchases of 1.0 trillion South Korean won worth of KOSPI stocks in July, in sharp contrast to net sales of 2.2 trillion South Korean won in May and 2.4 trillion South Korean won in June. Citi Research pointed out that when the KOSPI was around 6,500 points, the NPS's domestic equity allocation ratio had dropped to 24.2%, lower than the 29.4% in May.

Citi believes that considering the potential public backlash if the NPS were to significantly reduce its domestic equity holdings, the NPS is likely to maintain an overweight position in domestic stocks for an extended period, with its domestic equity allocation cap potentially reaching 28.8% or even higher. Additionally, Citi expects that if the KOSPI rises to the 9,000–10,000 point range this year, the NPS may gradually resume its rebalancing operations for South Korean stocks.

Citi maintains 10,000-point target, watching for potential policy support

Amid multiple positive signals, Citi Research maintains its year-end target for the KOSPI at 10,000 points unchanged and lists several tailwind factors supporting this target.

Citi believes that the robust fundamentals of the memory chip industry, combined with the KOSPI's current valuation at historical lows, constitute core support for the market. Meanwhile, South Korea's strong economic fundamentals and favorable policy mix are forming new upward momentum.

Notably, Citi also pointed out that if market conditions require it, South Korean financial authorities may provide liquidity support, including intervention tools such as establishing a stock market stabilization fund, which provides a certain degree of policy bottom support for the market. Citi believes that as headwinds in capital flows continue to dissipate, the combined force of the aforementioned fundamental and policy factors will become increasingly evident.