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Seoul shares tipped to benefit from global indices' China exclusions

Dec 13, 2020 (Gmt+09:00)

Key South Korean financial market indices at Dec. 11 market close
Key South Korean financial market indices at Dec. 11 market close

Global index providers' recent decisions to remove Chinese companies from their benchmarks are expected to draw additional global and institutional money into South Korean stock markets, which have been in liquidity-driven rallies led by retail investors

S&P Dow Jones Indices said last Thursday it would exclude 21 Chinese companies from its global equity and bond benchmarks, shortly after the FTSE Russell announced the removal of eight Chinese companies from its FTSE global equity indices and the FTSE China A inclusion index, from Dec. 21.

Their decisions followed Donald Trump's executive order in November, banning US investments in Chinese firms named by the US government as having ties to the Chinese military. Among the Chinese companies to be excluded from the benchmarks are China’s largest foundry company SMIC and surveillance camera maker Hangzhou Hikvision.

Another major index provider MSCI Inc. is also moving to follow suit.

The 10 Chinese companies to be removed from the S&P Dow Jones' global equity index have a combined market value of $204 billion. In the MSCI Global Index tracking $5.6 billion worth of stocks, China represents 5.2%.

Such unprecedented simultaneous moves by global index companies are likely to boost confidence in Seoul stock markets, giving more room to break above the 3,000-point barrier for the first time.

The broader Kospi index touched a record-high close of 2,770.06 on Dec. 11, buoyed by news of the COVID-19 vaccine development that has underpinned the earnings outlook for Korean companies.

The iShares MSCI South Korea ETF, managed by BlackRock, has drawn a net $597.1 million between Nov. 19 and Dec. 8 in aggregate. It was the first time for a global fund tracking South Korean companies to attract such a substantial amount of money since March of this year. By contrast, the iShares MSCI China EFT saw no fresh money inflows during the same period.

“There is a growing demand for hedging China risk while investing in emerging markets,” said KB Investment analyst Hah In-hwan. “Domestic stock markets are expected to benefit (from global index providers’ moves) at least through the end of this year.”
Courtesy of Getty Images Bank
Courtesy of Getty Images Bank

The Kospi has risen more than 5% since the beginning of this month, whereas the Shanghai stock market, or SSE Composite Index, declined over 3% during the same period. The Korean won has firmed to 165 against the Chinese yuan, breaking through the 168-174 range where the pair was stuck for most of the year.

Last week, J.P. Morgan forecast the Kospi to continue its bull run to 3,200 points next year, reflecting expectations of a corporate earnings' rebound once the COVID-19 pandemic eases and abundant market liquidity, amid tightened government restrictions on real estate investments. 

Foreign investors were net buyers of $5.5 billion in Korean stock markets last month, marking their largest net purchase for a single month in the country since September 2013. They account for 30% of the main Seoul stock market.

FOREIGN SELLING IN KOSPI FUTURES

But some analysts voiced a note of caution, as foreign investors turned net sellers in both spot and futures stock markets in Seoul this month. Offloading both spot and futures products seem to reflect their bearish views of Seoul shares.

For most of this year, they bought futures while selling in spot markets. But they offloaded a net 726.6 billion won on the main bourse since the beginning of this month as of the Dec. 11 close and cashed out of a net 869.4 billion won in Kospi 200 futures during the same period.

Last month, they were net buyers of 5 trillion won and 3.6 trillion won in spot and futures trade of Seoul shares, respectively.

“They may believe COVID-19 vaccine-led market rallies have run their course,” said IBK Investment & Securities research head Chung Yong-taek.

But Shinyoung Securities research head Kim Hak-gyun played down foreign selling, which he said could be aimed at hedging against heavy net purchases of Seoul shares in the spot market last month, given the extended short-selling ban until early next year.

Another analyst said foreign investors' shift into selling might be related to their year-end book closing.

In comparison, retail investors purchased a net 62.5 trillion won in Seoul stock markets since the start of this year as of the Dec. 10 market close. Their deposits at brokerage firms for equity investments topped 60 trillion won ($55 billion).

Retail investors have become the biggest buying force in Seoul stock markets this year, absorbing heavy selling from foreign investors.

Write to Ji-yeon Sul and Byeong-Hoon Yang at sjy@hankyung.com

Yeonhee Kim edited this article.

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