Foreign Investors:
Good or Bad?

Foreign investors sell over 10 tln won worth of stocks in net since last year

In July, 2000, Samsung Electronics share price rose sharply to hit 370,000 won per share, but three months later in October, it plunged to the level of 130,000 won per share with foreign investors selling them like hot potatoes. During the three- month period, the stock market suffered from rumors that foreign investors started fleeing the market selling their large Korea share portfolios.
At the time, foreign investors sold only three percent of stakes of the world-renowned electronics company. But the share price skidded by one/third of its peak price reached in July. Stock market analysts believed that Korea would have faced with its second financial crisis had foreign investors decided to flee the country by selling their Korean shares in droves, an indication for the Korean stock market's heavy dependence on foreign investors.
Foreign investors have been selling off their Korean shares since last year again. Until July, they sold some 10.6 trillion won worth of Korean shares in net. They have been net-selling the shares for two years in a row since they were allowed to invest in the Korean bourses in 1992.
According to a survey of 52 stock analysts, a majority of them said the phenomenon of rush by foreign investors to get out Korea would be a long one, meaning that an increasing number of them will leave Korea and selling off their Korean shares in larger numbers in the future. But at the stock market the confusion that developed in 2000 is no where to be found this time. Why? Is it all right to expect that no big change is ahead's According to the Korea Stock Exchange, foreigners net-sale of shares amounted to 6.376,6 trillion won during the Jan.-July period. The figure is 2 trillion won more than those during the same period last year. Foreign investors sold more shares than they bought only twice since 1992, once in 2002 and another in 2005. If the trend holds, it would mark the first time that foreign investors sold shares more than they bought for two years in a row.
The weight of foreign investors in the stock market has also been declining fast in recent years. In July, 2004, it reached 43.88 percent but as of Aug. 2, it sank to 38.95 percent to show that foreign investors will keep on selling shares than they buy in the future to make it a long-term trend. The survey showed that 42 of those stock market experts contacted said foreign investors will sell more shares in the future than they buy. The same survey showed that 27 of those 52 experts projected that foreign investors share of the stock market will continue to shrink as low as 30 percent down the road, meaning that there is a likelihood that they will sell 68 trillion won worth of Korean shares in the future.
On the other hand, indirect investment by domestic investors in the stock market will emerge as a formidable concern in the future. The number of indirect investment accounts totaled 11.74 million as of the end of June with the installment fund accounting for 7.04 million accounts.
The declining foreigners'share has laid to rest the concern for the loss of national wealth. According to the futures stock market figures, domestic investors plunked down some 194.974 trillion won in the market in net increase. On the other hand, foreign investment in the market increased 97.834 trillion won, showing that domestic investors passed their foreign rivals in increasing their investment in the stock market.
But many say it is too early to have a comfortable outlook on the stock market. The market has been stable due to the ability on the part of domestic institutional investors to absorb the shares sold off by foreign investors worth 10.600 trillion won. But if foreigners share is shrunk down to 30 percent, domestic investors should be able to their shares sold off worth some 68 trillion won. An analyst with Hanhwa Securities said it depends on how fast foreign investors would want to divest their portfolios; long-term or short-term basis.
Opinions of experts vary on the subject. Many(28) of the experts contacted in the survey said foreign investors just want to cash in on their share prices differences and the same time reduce their share holdings considered too high, not because of "sell Korea"trend. But some of the experts(20) said the move has to do with the worsening market conditions due to such factors as North Korea's missile launch, and labor conflicts with 15 of them agreeing with the reasoning. They would not rule out the development of "sell Korea"syndrome among foreign investors under the presumption, which could be damaging to the financial market.
They(30) further stress that domestic institutional investors should be ready for the eventual mass withdrawal of foreign investors from the stock market. Some 25 of the analysts said the establishment of a sound and long-term investment climate in the stock market is the most required priority, while 22 of them said the market invigoration measures should be enforced to revitalize the market by drawing domestic investors to invest in stocks. Some of them(18) said an investment climate should be created, while 17 of them said financial companies should grow further to beef up their strength.

The Role of Foreign Investors:
Foreign investors began to dominate the stock market after the financial crisis in 1997 with the government deciding to open the financial market completely to foreign investors in exchange for the emergency IMF loan to solve the crisis.
Foreign investors, since the opening of the stock market in 1998, has left a number of their foot prints in the market including transparency of management of listed firms and management to pay a serious attention to shareholders'interest. They also left a huge imprint on public notices on management information for investors and listed firms concern for its share holders through dividends and buying their own shares for the sake of their share holders.
But there have been some negative impacts also. Foreign investors often threatened to management of domestic firms through the stock market. Now, domestic firms called for the need to draw measures to protect themselves from hostile takeover threats by foreign investors, who often brought confusion to the stock market with M&As their weapons. Taking advantage of benefits allowed to foreign investors, they invested only in stocks, not direct investments in plant facilities.
A stock market analyst Kim Hak-kyun with Goodmorning Shinhan Securities, pointed out that foreign investment expanded, but not in businesses or plant facilities. Many foreign investors invested in the stock market and left with their profits.
Lone Star, New Bridge Capital, Carlyle Fund, and Quantum Fund are good examples in that they only bought stocks not in businesses, and left the country after making a bundle of profits.
Many domestic firms kept their eyes on foreign shareholders too much and tried to increase dividends or bought their own company shares to boost their prices, which deprived the domestic firms of dynamic management they have been known for.
Listed firms spent 4.830,5 trillion won to buy their own shares last year. Samsung Electronics alone spent 1.858,2 trillion won to buy their own shares after April this year, which is more than their second quarter operating profit. nw