In the face of global financial market turmoil, South Korean retail investors, often referred to as “ants” due to their sheer numbers and collective influence, are increasingly pouring their funds into U.S. stocks. This trend, driven by discontent with domestic market conditions and buoyed by the global AI boom, shows little sign of slowing down.
Shift Toward U.S. Tech Giants
South Korean investors have been avidly buying shares of major U.S. tech companies like Nvidia, Tesla, and Apple throughout 2023. These investments are partly fueled by the global excitement surrounding artificial intelligence, despite South Korea’s government efforts to boost the local stock market.
Sunny Noh, a 49-year-old South Korean investor, epitomizes this trend. With 85% of his financial assets invested in Tesla, Noh views recent market dips as long-term buying opportunities, confident in a future rebound over the next decade.
The “Korea Discount”
The shift toward U.S. stocks is largely attributed to what is known as the “Korea discount,” where South Korean stocks are undervalued compared to their global counterparts. The domestic stock market, valued at $1.8 trillion, is home to global giants like Samsung Electronics and SK Hynix. However, shareholder returns have been lackluster. Over the past decade, the dividend payout ratio in South Korea has averaged 26%, significantly lower than Taiwan’s 55%, Japan’s 36%, and the U.S.’s 42%.
This disparity is further highlighted by the performance of South Korea’s leading companies. Samsung’s shares have declined by 4% this year, while Nvidia’s have surged by 120%. Although SK Hynix has fared better with a 25% increase, the broader domestic market struggles to keep pace with international benchmarks.
Retail Outflows and Government Challenges
The trend of South Korean investors moving their money overseas poses a challenge to the government’s efforts to enhance the domestic market. In the first half of 2023 alone, South Korean retail investors sold a record 16.3 trillion won ($11.9 billion) worth of domestic stocks, contributing to a 1.3% decline in the KOSPI index. In contrast, the S&P 500 and Japan’s Nikkei index rose by 13% and 5%, respectively.
Despite foreign buying of Korean stocks reaching a record 27 trillion won during the same period, retail investors accounted for 54% of daily trading turnover, compared to 27% for foreign investors. This imbalance underscores the difficulties faced by the government in revitalizing the domestic market.
The South Korean government’s “Corporate Value-up Programme,” which includes tax incentives aimed at attracting retail investors, mirrors Japan’s capital market reforms. However, analysts remain skeptical about its potential impact, citing the opaque governance structures of South Korea’s family-run “Chaebol” conglomerates.
Aging Population and Long-Term U.S. Market Bets
As South Korea’s population ages, the demand for higher returns is expected to sustain the flow of funds into U.S. stocks. Retail investors like Oh Jeong-min, who lost 100 million won ($73,012) during last week’s market shakeout, remain undeterred. Oh plans to invest more in U.S. stocks, citing the more favorable dividend payouts and shareholder returns offered by American companies.
The significant shift in South Korean investment patterns has not gone unnoticed. In July, Elon Musk praised South Koreans as “smart people” after data revealed that Tesla was the top U.S. stock held by South Koreans, with holdings amounting to $13.6 billion by the end of July. Nvidia and Apple followed with $12 billion and $5.1 billion, respectively.
According to Seungyeon Kim, CEO of Toss Securities, South Korea has emerged as a major player in Asia, with its investment in U.S. stocks surpassing that of Japan. For many South Korean investors, the U.S. market remains the preferred choice for long-term growth, despite the volatility of global financial markets.
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