Can Kospi really break 7,000? Rising rates add to pressure — 'Foreign investors must return'

The Kospi opened sharply lower Wednesday as surging global bond yields, driven by inflation fears tied to a spike in oil prices, weighed on the market. While buybacks by Samsung Electronics and SK hynix are providing a floor for the index, analysts say a recovery in foreign investor flows will be needed for any meaningful rebound.

According to Korea Exchange, the Kospi stood at 6,666.56 as of 10 a.m. Wednesday, down 169.24 points, or 2.48 percent, from the previous session. The index had opened at 6,625.47, a drop of 210.33 points, or 3.08 percent.

On the Kospi market, foreign investors and institutions posted net selling of 536.3 billion won ($391 million) and 655.1 billion won, respectively, dragging the index lower. Individual investors recorded net purchases of 900.8 billion won, while other corporations net-bought 290.6 billion won, extending their buying streak to 11 consecutive trading days.

The Kosdaq index fell 0.92 percent from the previous session to 813.72 at the same time. It had opened down 18.45 points, or 2.25 percent, at 802.80, briefly touching an intraday low of 796.34.

The main drag on domestic markets is the sharp rise in oil prices and bond yields stemming from escalating tensions in the Middle East. Rising long-term interest rates reduce the relative appeal of equities and push up discount rates on corporate valuations, adding pressure to stock markets.

Oil prices soared Tuesday (local time) as US airstrikes on Iran heightened tensions in the region. November-delivery Brent crude futures settled up 4.60 percent at $94.65 per barrel, while October-delivery West Texas Intermediate rose 5.20 percent to close at $90.22.

The surge in oil prices amplified inflation concerns, sending global bond yields higher. The yield on the 10-year US Treasury note rose 3 basis points from the previous session to 4.788 percent, its highest level since January last year. The 30-year yield also climbed to 5.272 percent, approaching its highest point since 2007.

Long-term government bond yields in other major economies also rose across the board. Japan's 10-year government bond yield climbed to 3 percent during trading, its highest level in about 30 years since October 1996. The yield on the UK's 30-year government bond rose to an intraday high of 5.919 percent, its highest since 1998.

All three major US stock indexes closed lower overnight. The Dow Jones Industrial Average fell 0.79 percent to 52,766.88 on Tuesday (local time). The S&P 500 dropped 0.71 percent to 7,631.47, while the NASDAQ Composite declined 1.03 percent to 26,099.77.

Top-capitalization stocks on the domestic market also fell broadly on the external headwinds. Samsung Electronics and SK hynix were down roughly 2 percent and 3 percent, respectively.

Among investor groups, other corporations have recently been providing support at the lower end of the Kospi. Their continued buying Wednesday helped the index pare some of its early losses after the open.

According to Korea Exchange, foreign investors net-sold 1.14 trillion won on the Kospi market over the two sessions from Monday through Tuesday, while institutions net-sold 1.42 trillion won and individuals net-sold 686.6 billion won. All three investor groups posted net selling for two consecutive trading days.

Other corporations, by contrast, net-bought 3.24 trillion won over the same period, absorbing the supply. The figure reflects Samsung Electronics' buyback for employee stock compensation and SK hynix's buyback for share cancellation.

The buyback completion rates for Samsung Electronics and SK hynix are estimated at approximately 23.8 percent and 24.4 percent, respectively. Brokerage analysts expect the supply-side support to continue through mid-October if the current pace of purchases is maintained.

However, buybacks alone have their limits in lifting the index. Over the two trading days when foreign investors, institutions and individuals all turned to net selling, other corporations stepped in with net purchases — yet the Kospi managed gains of only 0.46 percent and 0.23 percent, respectively.

Brokerage analysts broadly expect the Kospi to trade in a range around the 7,000-point level this month.

"Uncertainty persists, but we expect the Korean market to trade in a range rather than see a sharp further correction," said Hwang Su-wook, a researcher at Meritz Securities. "Large-scale shareholder returns by the two semiconductor giants are supporting the index's lower end, but the upside is also capped by the burden of rising interest rates."

Kim Jun-young, a researcher at iM Securities, also projected "a range-bound market around the 7,000-point level for now," citing stagnant semiconductor earnings estimates that leave the market without a catalyst to break through the upper end of the range.

Experts agree that a return of foreign investors is needed for the Kospi to break through the top of its trading range. Last month, foreign investors net-sold 10.18 trillion won on the Kospi market, extending their selling streak to four consecutive months since May.

"The cumulative net purchase amount by individual investors above the 7,000-point level stands at around 110 trillion won, meaning there is a high likelihood of selling pressure from investors seeking to break even when the index rebounds," said Han Ji-young, a researcher at Kiwoom Securities. "What is needed is buying momentum from foreign investors and institutions capable of absorbing the overhang of individual selling accumulated in that zone."