A significant shift is underway in the capital flows of the South Korean stock market. Foreign investors set a new all-time record for single-day net purchases, while the selling pressure from domestic institutions has also notably receded. Combined with tighter regulations on leveraged ETFs, these factors are collectively pointing to a marginal improvement in the volatility of the KOSPI market.

On July 31, foreign investors purchased a net 7.2 trillion won of KOSPI stocks, the highest single-day net buying figure ever recorded. According to a report from Citi Research analyst Jin-Wook Kim, cited by market sources, this figure marks a fundamental reversal of the large-scale foreign net selling trend that had persisted for several months. Citi Research maintains its KOSPI year-end target of 10,000 points, arguing that the headwinds from capital flows are continuing to diminish.

Foreign net buying hits a record, monthly sales narrow significantly

The scale of the foreign capital reversal is unprecedented in historical data. The net purchase of 7.2 trillion won on July 31 far exceeds any previous single-day record, signaling a drastic change in foreign sentiment towards the KOSPI.

According to the Citi Research report, the recent KOSPI correction was primarily driven by foreign investors' rebalancing and profit-taking activities. 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 reinforced at the end of the month.

On a monthly basis, net foreign selling in July narrowed to 9.8 trillion won, a substantial decrease compared to the 48.4 trillion won and 44.5 trillion won net sales recorded in June and May, respectively. This sharp contraction indicates that the foreign selling pressure, which had previously dominated the market downturn, has been greatly alleviated, and the momentum of bargain-hunting buying is building.

Regulatory tightening on single-stock leveraged ETFs helps stabilize market volatility

The Financial Services Commission (FSC) of South Korea officially tightened the entry requirements for retail investors to access single-stock leveraged ETFs from July 31. This new regulation is expected to dampen overall volatility in the KOSPI market.

Specifically, the minimum margin requirement for retail investors participating in single-stock leveraged ETFs has been significantly raised from 10 million won (in a mix of stocks and cash) to 30 million won (in cash only). The market effect was immediate. According to a Yonhap News Agency report on July 31, trading volumes of major single-stock leveraged ETFs fell to approximately 50% of their monthly average following the implementation of the new rules. Furthermore, the market capitalisation of 16 single-stock leveraged ETFs has also visibly contracted.

Citi believes that the reduced participation of retail investors in high-volatility instruments will help to smooth short-term fluctuations in the KOSPI market, providing a more stable operating environment.

Concerns over national pension rebalancing fade as fund buying turns positive

The market had previously harboured concerns about selling pressure from potential rebalancing operations by the National Pension Service (NPS). However, actual data from July shows that institutional money has quietly shifted direction.

South Korean pension funds and other funds together recorded a net purchase of 1.0 trillion won in KOSPI stocks in July. This contrasts sharply with the net sales of 2.2 trillion won in May and 2.4 trillion won in June. Citi Research notes 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 suggests that given the potential public backlash if the NPS were to significantly cut its domestic stock holdings, the institution is likely to maintain an overweight position in local equities for an extended period. Its domestic equity allocation ceiling could be as high as 28.8% or even higher. Additionally, Citi expects that if the KOSPI can rise to the 9,000 to 10,000-point range this year, the NPS might gradually resume its rebalancing operations for South Korean stocks.

Citi maintains KOSPI target of 10,000 points, focusing on potential policy support

Against a backdrop of multiple positive signals, Citi Research maintains its year-end KOSPI target of 10,000 points. It lists several supportive factors underpinning this target.

Citi believes the strong fundamentals of the memory chip industry, combined with the KOSPI's current valuation at historical lows, form the core support for the market. At the same time, South Korea's robust economic fundamentals and a favourable policy mix are creating new upward momentum.

Notably, Citi also pointed out that if market conditions require, South Korean financial authorities have the potential to provide liquidity support, including intervention tools such as establishing a stock market stabilisation fund. This provides a degree of policy floor for the market. Citi concludes that as headwinds from capital flows continue to subside, the combined effect of these fundamental and policy factors will become increasingly apparent.