South Korean retail investors are choosing to invest in foreign stock markets over the Korean stock market for higher returns.
Retail investors in Korea sold $9 billion (12.4778 trillion won) Korean stocks up to June 14 this year, according to the Korea Exchange and the Korea Securities Depository on June 17. Korean investors bought 8.55 trillion won worth of U.S. stocks, including tech giant Nvidia, during the same period. Even in tax-saving individual savings accounts (ISAs), the proportion of exchange-traded funds (ETFs) investing overseas has surpassed domestic ETFs for the first time. The biggest player in domestic equities, the National Pension Service (NPS), has also been reducing investments in domestic stocks.
While it is natural for investors to aim for higher profitability, experts are concerned that this so-called “stock migration” will perpetuate the “Korea discount,” the trend of Korean stocks constantly underperforming compared to global peers.
The country’s largest institutional investor, the NPS, has been increasing its overseas investments to boost returns. The Fund Management Committee, the highest governing body at the NPS, decided to lower the proportion of domestic stock investments from 15.4% this year to 14.9% next year. The target percentage for domestic bonds was also lowered from 29.4% to 26.5%. The amount of domestic stock and bond investments that will be reduced will be 37.4 trillion won. Meanwhile, the proportion of foreign stocks has been raised from 33% to 35.9%.
Among the financial products invested in ISAs, the proportion of ETFs investing overseas was 19.7% as of the end of April, up from 4.3% last December. The proportion of ETFs investing domestically plummeted from 15.5% to 7.3% during the same period. This is the first year the proportion of international to domestic ETFs has been reversed.
Investors who sell domestic stocks are heading overseas. Korean investors held $126.34 billion in foreign stocks as of June 13, according to data by the Korea Securities Depository. This is up from $104.1 billion last December. The increase in U.S. investments is particularly notable. Korean investors held $84.5 billion in U.S. stocks, approximately ten times the amount held at the end of 2019, at $8.4 billion.
Analysts point to higher returns as why investors have been ditching Korean stocks for foreign equities. According to the Korea Corporate Governance Forum, the total return, including dividends, on the Korean stock market averaged 5% per year over the past decade, lower than the U.S. (13%), Japan (11%), and Taiwan (10%). Korea’s stock market has remained relatively stagnant, while major stock markets have been setting record highs in the past decade.
According to Bloomberg, 14 out of 20 stock markets in the U.S., Japan, and other countries have set new record highs this year, but the KOSPI has only gained 3.8%. For the NPS, the yield on domestic stocks was only 5.53% in the first quarter of this year, compared to 13.45% for overseas stocks.
