South Korea's finance minister: foreign investors' portfolio rebalancing is one of the causes of volatility in the South Korean stock market

South Korea's finance minister has identified foreign investors' portfolio rebalancing as a contributing factor to recent volatility in the South Korean stock market. The Kospi, the country's benchmark index, has experienced significant swings, including a 6% drop last week, amid heavy foreign outflows totaling $13.2 billion. This selling pressure has led to heightened market uncertainty and triggered mechanisms to stabilize trading, such as a temporary halt on program trading after sharp losses in stock-index futures.

The volatility has been exacerbated by broader trends in emerging Asian markets, where overseas investors pulled $17 billion last week, the second-largest weekly outflow on record. South Korea accounted for the bulk of these outflows, with analysts noting that the country's market appeared "much more overbought than in the U.S." Citigroup strategists advised reducing exposure to their bullish Korea trade, citing rising risks and signs of exuberance among local retail investors.

The finance minister emphasized the need for swift policy responses to address the imbalance in dollar demand and supply, which has contributed to increased foreign exchange market volatility. The won recently hit its weakest level since December 24, extending losses for an 11th consecutive session. Authorities are examining measures to counter "excessively pessimistic" market sentiment and align the currency's value with economic fundamentals.

While the market's volatility has raised concerns, both Citigroup and Goldman Sachs believe South Korea's rally could continue, particularly with anticipated passive inflows linked to MSCI's upcoming index rebalance. The government remains focused on regulatory reforms and improving the investment climate, including efforts to secure developed-market status and streamline processes for foreign investors.