Foreign investors shift from growth stocks to net buy $3.5 bn in cyclicals

South Korea's stock market is seeing a shift in buying trends from foreign investors who are increasingly beefing up investments in cyclical stocks while scaling back on growth stocks.

Offshore investors have ramped up share purchases in sectors that are expected to post improved performances next year such as semiconductors, finance, chemicals and hotels while selling off battery, bio, internet and gaming (BBIG) stocks that led the market rebound amid the coronavirus crisis.

Between Nov. 1 and 12, offshore investors scooped up a net 3.9 trillion won ($3.5 billion) worth of shares from the Korean market, reflecting a shift in investment strategy.

Cyclical stocks were highly sought after as foreign investors purchased around 1.47 trillion won worth of shares in Samsung Electronics Co., followed by LG Chem Ltd. (461.8 billion won), SK Hynix Inc. (385.5 billion won), Samsung SDI Co. (277.1 billion won), Hyundai Mobis Co. (93.6 billion won), Hana Financial Group Inc. (76.4 billion won) and LG Household & Healthcare Ltd. (71.9 billion won), among others.

Usually when offshore investors increase Korea-based investments in their portfolios, their picks are companies with high market capitalization backed by passive inflow.  However, this time they offloaded a substantial amount of bio, internet and game companies among the highest on the market cap list in Korea.

Leading internet, bio and game companies such as Naver Corp., Genexine, Inc., NCsoft Corp., Seegene Inc. and Netmarble Corp. were among the most sold stocks with foreign investors offloading over a combined 300 billion won. Sellers saw gains from growth stocks that soared amid the global coronavirus crisis, thanks to strong performances from non-contact, non-face to face companies.

“Investors will pour money into sectors that are likely to see a drastic rise in earnings next quarter,” said Lee Eun-taek, an analyst at KB Securities. “It’s unlikely for them to hold on to tech and growth stocks in hopes of making big gains in the next five or 10 years.”

Cyclical stocks including semiconductors, chemicals, steel and finance among others are likely to perform bullish until early next year. In 2021, sectors including energy, steel, hotel, leisure and insurance are expected to show a strong earnings recovery.

The shift in foreign investors' buying trend is also tied to the yield movement as the US 10-year treasury bond yield climbed to 0.962% on Nov. 10, a 0.195 gain in just four days and the highest since posting 1.156% on Mar. 19.

In the face of low interest rates, it is natural for highly-valued growth stocks to be traded on the market but they will lose appeal when there is a rebound in the interest rates.

“A rebound in interest rates will make it difficult to justify the valuation of domestic growth stocks, which could perform weakly until the first quart of next year,” said Cho Ik-Jae at Hi Investment and Securities.

However, market watchers say that growth stocks are expected to turn bullish in the second quarter of next year since their value is tied to real interest rates instead of nominal yields.

“The real interest rate will see a downtrend starting in the second quarter of next year following the US central bank’s policy,” said Kim Sang-ho, a Shinhan Investment analyst. "Growth stocks are likely to be on the rise again once companies’ performance recovery slows after the first quarter.”

Write to Yun-sang Koh at kys@hankyung.com
Danbee Lee edited this article.