SEOUL—Foreign investors continued their retreat from South Korean equities in May, extending a selling streak to five consecutive months. This outflow of international capital contrasts with the KOSPI index's climb to fresh highs, driven by domestic buying.
Domestic institutional and retail capital has absorbed the foreign selling pressure, fueling the rally. Much of this buying concentrates on the artificial intelligence sector, particularly semiconductor manufacturers. Companies like Samsung Electronics and SK Hynix, critical suppliers for global AI infrastructure, have seen upward re-ratings. SK Hynix has reported its high-bandwidth memory production is sold out through the end of 2025.
The foreign exodus reflects a reassessment of relative value and duration risk in a high-rate environment. Global capital is shifting toward higher-yielding, lower-duration assets. U.S. Treasury yields, with the two-year at 4.89 percent, offer a compelling alternative to growth-oriented equities, particularly those in emerging markets. This creates a crowding out effect, where attractive fixed-income returns divert capital that might otherwise flow into Korean equities.
Currency dynamics also play a role. The Korean won has shown weakness against the dollar, trading near 1,370 won per dollar. This depreciation adds currency risk for international investors, eroding potential equity gains when repatriated. The Bank of Korea has held its policy rate at 3.50 percent, creating a yield differential against the Federal Reserve's current target.
The domestic-led rally faces questions about sustainability. Should global risk appetite wane or U.S. rates remain elevated for an extended period, the absence of foreign bids could expose the KOSPI to sharper corrections. Bond market participants are monitoring this liquidity dynamic, recognizing that a sudden reversal of local sentiment or a shift in the global yield curve could trigger broader market instability for Korean assets.
