Has the Worst for KOSPI Passed? Foreign Buying Hits Record High, Pension Funds Turn Bullish, Citi Maintains 10,000-Point Target

Citi Securities believes the worst of the funding environment for South Korea's stock market has passed. With foreign investors posting a record single-day net buying, pension funds turning net buyers, and regulators tightening rules on leveraged ETFs to curb market volatility, the funding environment is steadily improving. As a result, Citi maintains its year-end KOSPI target of 10,000 points, indicating continued upside potential for Korean equities.

According to a recent report by Citi analyst Jin-Wook Kim, Friday's (31st) foreign buying volume symbolizes a fundamental reversal in the trend of sustained foreign outflows from Korean stocks over the past few months.

Citi continues to maintain its annual KOSPI target at 10,000 points, noting that funding headwinds are steadily receding.

On a monthly basis, foreign net selling in July narrowed significantly to 9.8 trillion KRW, a sharp decline from 44.5 trillion KRW in May and 48.4 trillion KRW in June.

Citi analysts attribute the recent correction in Korean stocks primarily to foreign portfolio rebalancing and profit-taking. However, since mid-July, the pace of capital returning to KOSPI and related overseas passive ETFs has clearly accelerated, with the trend intensifying further toward month-end.

At the same time, South Korea’s pension funds and trust funds turned net buyers of KOSPI stocks in July, purchasing 1 trillion KRW. This marks a clear reversal from May’s 2.2 trillion KRW net sell-off and June’s 2.4 trillion KRW net selling.

In addition to shifting capital flows, regulatory policy has also played a supportive role. South Korea’s Financial Services Commission (FSC) raised the minimum margin requirement for retail investors entering single-stock leveraged ETFs effective July 31. The requirement was increased from 10 million KRW (calculated as combined stocks and cash) to 30 million KRW in cash only.

The impact of the new rules was immediate. According to Yonhap News, trading volume in major single-stock leveraged ETFs has shrunk to about half of monthly average levels since the new rules took effect, and the market capitalization of all 16 related ETFs has also contracted.

Citi believes that reduced retail investor appetite for high-volatility products will help suppress short-term volatility in the KOSPI, creating a more stable trading environment.

Market concerns had previously centered on the possibility that the National Pension Service (NPS) might intensify selling pressure due to asset allocation adjustments. However, actual data from July shows these concerns have eased.

Citi notes that when the KOSPI was hovering around the 6,500-point level, the NPS’s domestic equity allocation had already dropped to 24.2%, down from 29.4% in May.

Citi analysts believe that given the potential for public backlash if the NPS significantly reduces its domestic equity holdings, the institution is likely to maintain an overweight position in domestic stocks for the foreseeable future, with the allocation ceiling possibly rising to 28.8% or higher.

Moreover, Citi estimates that if the KOSPI successfully reaches the 9,000–10,000 point range by year-end, the NPS may initiate a gradual rebalancing process.

Taking all these signals into account, Citi maintains its year-end KOSPI target of 10,000 points. The firm highlights that solid fundamentals in the memory chip sector, combined with KOSPI’s historically low valuation, form the core support for the market. Additionally, South Korea’s strong macroeconomic performance and supportive policy mix are injecting fresh upward momentum into equities.

Notably, Citi also suggests that if necessary, South Korean financial authorities may consider liquidity support measures, including the potential establishment of a stock market stabilization fund, providing a degree of policy backstop for the market.

Citi expects that as funding headwinds continue to recede, the dual support from fundamentals and policy will become increasingly evident in the coming months.