Foreign equity inflows return after 8 months on strong US tech earnings

Foreign capital returned to a net inflow in South Korea's stock market last month for the first time in eight months, driven by strong earnings from US technology companies.

According to the Bank of Korea's "International Finance and Foreign Exchange Market Trends" report released Thursday, foreign investment in Korean securities — both shares and bonds — recorded a net outflow of about $4.5 billion in August. A net outflow means more foreign capital left the Korean market than entered it. Foreign funds have been in net outflow territory since February.

The outflow was, however, significantly smaller than in July, when it reached $21.65 billion.

Breaking down by asset type, bond funds recorded a net outflow of $4.53 billion last month. Bonds had posted net inflows for three consecutive months from April before swinging back to net outflows in July.

The Bank of Korea said the outflow expanded due to a deepening reversal of short-term arbitrage incentives and rising market interest rates.

Equity funds, meanwhile, posted a net inflow of $35 million — the first since January, ending an eight-month streak of outflows. The central bank said the shift came despite dampened investor sentiment from geopolitical tensions in the Middle East and rising long-term global interest rates, with strong US technology company earnings providing enough of a boost to tip flows into positive territory.

The credit default swap premium on South Korean government bonds — based on the five-year foreign exchange stabilization bond — averaged 22 basis points in August, slightly below the previous month's 23 basis points. One basis point equals 0.01 percentage point.

The won-dollar exchange rate's daily fluctuation range and rate of change narrowed in August to 4.4 won and 0.31 percent, respectively, compared with 8 won and 0.53 percent in July.