In the foreign exchange dealing room of Hana Bank’s main branch in Seoul, foreign exchange traders are keeping an eye on the monitor.
Kim Jae Hwan | SOPA Images | Light Rocket | Getty Images
Amid the influx of global investors, a wave of Korean investors is flooding into the U.S. market to avoid domestic corrections.
South Korean retail investors were net sellers of domestic stocks for much of last week, even as benchmark indexes entered bull market territory, according to data from the Korea Exchange. Overseas investors took a turn and became net buyers.
Here are five things that are relevant to these investors.
Purchase of ADR
Of the $4.5 billion in net purchases of U.S. stocks by South Korean investors in July, about $840 million went into the semiconductor maker’s U.S.-listed depositary receipts, according to data from the Korea Securities Depository Center. Despite Korean investors being able to buy the same company directly domestically, SK Hynix’s ADRs became the second most net-bought U.S. stock.
U.S. receipts have been trading at a premium to South Korean stocks, recently about 10%, said Owen Lamont, senior vice president at Acadian Asset Management. Volatility has also increased.
“It’s absolutely crazy,” Lamont said of Korean investors buying SK Hynix’s U.S.-listed shares. “There is no reason for Korean investors to buy ADRs of Korean stocks in the US.”
Lamont said such price differences are unusual and could be a warning sign of over-speculation. “Those are symptoms of a bubble,” he said, pointing to similar turmoil involving companies in Taiwan and India around the dot-com boom.
Bet with leverage
One of the top 10 most popular U.S. stocks among investors this month was the leveraged product ProShares Ultra QQQETF, which ranked seventh.
According to data from the Korea Securities Depository Center, four of the 10 most-overbought U.S. stocks in July were leveraged products.
According to the data, the most popular was the Direxion Daily Semiconductor Bull 3X Stock ETF (SOXL), which aims to triple the semiconductor index’s daily performance. Leveraged ProShares UltraPro QQQ and ProShares Ultra QQQ ranked 4th and 6th.
same strategy
Investors may change the market without necessarily changing their bets.
“Ironically, when we analyze the data and look at what they are buying, we see that stocks primarily related to the same AI hardware theme are selling in the local market,” said Philip Uhl, head of research at Rayliant Global Advisors.
Chung In-yoon, founder of Fibonacci Asset Management, said some traders hurt by losses in South Korean semiconductor stocks and leveraged ETFs may be shifting to U.S. AI stocks, which they deem to be of higher quality and more liquid.
“They’re not necessarily reducing their exposure to the subject of AI,” Yun said. “They may simply be using different geographical means to express the same views.”
Reversed from July
South Korean retail investors bought about $4.5 billion in U.S. stocks last month, according to data from the Korea Securities Depository Center. This was a sharp increase from June and was close to the $5 billion in net purchases in January.
At the same time, the country’s stock prices rebounded this month after falling sharply following an impressive rally that drew retail investors into semiconductor stocks and leveraged products.
According to the Korea Financial Investment Association, the outstanding margin on the Korean stock market was about 37 trillion won ($26 billion) as of the end of June, but it had fallen to 27 trillion won, the lowest level this year, at the beginning of this month.
Lamont said July’s purchases were “strong” but not unprecedented, adding: “It’s still very interesting to see an increase in U.S. purchases even though the Korean market is in free fall.”
Market impact
Whether the influx of Korean money can meaningfully increase overall volatility in the much larger US market is another question.
We believe that there is little risk of this with wool. While individual investors can have significant influence in South Korea, the U.S. market is dominated by professional and institutional investors, and even large inflows from South Korea are small compared to overall trading volume.
Lamont sees more potential for distortion of individual names and corners of the market that retail traders prefer. He pointed to South Korean investors flooding into U.S. “quantum” stocks in late 2024, and said the prevalence of leveraged ETFs in South Korea, Hong Kong and the U.S. “may be increasing volatility and magnifying market fluctuations.”
