After sharp turbulence in Korean stocks, Barclays warns: "National Team" pausing portfolio adjustments will amplify market volatility.

The decision by Korea's National Pension Service (NPS) to suspend portfolio rebalancing is becoming a major driver of heightened volatility in Korea's stock and foreign exchange markets.

Barclays economist Bum Ki Son noted in his latest research report that although NPS's suspension of the rebalancing rule generated excess returns for the fund, it significantly amplified market volatility. "Pension funds are generally regarded as stabilizers of financial markets; however, NPS's adjustment of its operational rules has, instead, turned it into an amplifier of volatility," he wrote.

This warning comes as the indicator measuring KOSPI 200 volatility hit a record high earlier this week, and Korea's stock market is experiencing violent swings between extreme conditions.

Korea's Ministry of Health and Welfare—the overseeing agency for NPS—responded to Bloomberg's inquiry by stating that the fund management committee's previous decision aimed to improve the fund's profitability and stability, considering the efforts to build up fundamentals in Korea's capital market. The ministry also stated, "The Barclays report relies to a significant extent on overly strong assumptions, and its analysis of causal relationships has yet to be fully verified."

NPS Rebalancing Suspension: The Volatility Price Behind Excess Returns

NPS is Korea's largest pension fund and the biggest stakeholder in the Korean stock market. In January this year, the fund temporarily exempted itself from the rule that required mandatory rebalancing when asset allocations deviated from preset ranges. The management committee warned at the time that, in a highly volatile market environment—especially when domestic equities exceeded target allocation ranges—continuous rebalancing could create an excessive impact on local equities and the foreign exchange market.

However, Barclays' counterfactual analysis shows that the cost of this decision is not negligible. Bum Ki Son estimates that had NPS maintained normal rebalancing operations, its domestic stock return by the end of May would have been 11.1%; in fact, the actual return was 21.7%—a significant excess return, but portfolio volatility also surged. He points out that NPS's absence—by not selling when the market overheated, and by not buying during the declines in March and so far in June—directly intensified KOSPI's market volatility.

Official data shows that NPS's domestic stock return was 21.7% in Q1 this year, and as of March 31, its total assets stood at 1,526.1 trillion won (about $1 trillion). Meanwhile, with KOSPI rising by about 90% this year, becoming the world's strongest benchmark index, NPS sharply increased its domestic equity allocation target last month and reduced its overseas equity allocation target accordingly.

Pressure on Forex Market: Rebalancing Absence Spurs Dollar Demand Surge

Barclays' report also reveals the far-reaching impact of NPS's decisions on the won's exchange rate. Bum Ki Son wrote that NPS initially cited forex market pressure as one reason for suspending rebalancing, but this decision instead caused "significant pressure" on the forex market.

"We believe NPS’s rebalancing exemption, in effect, passed its rebalancing demand onto foreign investors, which then transformed into excess dollar demand driven by stock fund outflows from Korea's forex market," he wrote.

Data supports this view. Since the start of the year, global funds have had net sales of $78.7 billion from Korea's local stock market. Analysts attribute most of the outflows to funds passively reducing their positions after market leaders like Samsung Electronics and SK Hynix soared, causing holdings to exceed mandatory allocation caps. The won, earlier this month, fell to its lowest level since 2009, even as the Korean government pledged to curb excessive volatility. This week, authorities announced plans to crack down on speculative forex trading, resulting in the won's largest weekly gain in over a year.

Rebalancing Resumes in July: Execution Strength Becomes Key Variable

With NPS planning to resume rebalancing operations in July, the market's focus has shifted to the intensity of its execution. Bum Ki Son noted, "How strictly NPS adheres to rule-based rebalancing will be an important factor affecting the won's movement."

However, NPS has signaled softer execution—the fund has lowered its daily rebalancing cap. Barclays believes this could keep domestic stock market volatility and pressure on the won persistently high.

It is worth noting that the core logic driving this year’s record rally in Korea’s stock market—the artificial intelligence boom and the resulting demand for memory chips—remains intact. But the accumulation of margin debt and geopolitical shocks caused by the Iran conflict have repeatedly triggered sharp volatility. The KOSPI saw a historic 24% monthly rise in January, and again set a record with a 31% gain in April; the option premium paid to hedge market volatility also reached a historic high. Against this backdrop, whether the NPS’s rebalancing mechanism can truly return to normal will be a key indicator of Korea’s market stability in the second half of the year.

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