Is there risk in the South Korean stock market? Goldman Sachs: Retail investors have withdrawn, "buyback ammunition" ran out in October, only foreign capital can be relied upon.

The South Korean stock market is facing a critical moment as multiple supporting forces simultaneously crumble. Retail investors are withdrawing en masse, and institutional investors are continuing to net sell. The only remaining support – share buybacks by Samsung Electronics and SK Hynix – is expected to run out of ammunition by mid-October . At that point, the direction of the Korea Composite Stock Price Index (KOSPI) will depend almost entirely on foreign capital flows and the exchange rate of the Korean won.

In a report dated September 3, Goldman Sachs analyst Chris Cha pointed out that net retail buying in August plummeted by 90% compared to June , from 54.5 trillion won to 5.4 trillion won, indicating that the retail momentum that had driven the strong rebound of the KOSPI in the first half of the year had been largely exhausted. Meanwhile, foreign and local institutions also recorded net selling in August, with the market essentially only maintaining stability through corporate buybacks.

Goldman Sachs warns that, based on the current pace of share buybacks, Samsung and SK Hynix's buyback quotas will be exhausted between the end of September and mid-October , well before the companies' official deadline in November. Once this artificial support disappears, market support will return to regular institutional fund flows, which are clearly absent at current price levels. Goldman Sachs therefore advises investors to position themselves in advance to prepare for a potential liquidity shock in October .

Retail investors have completely withdrawn, and buying momentum has almost disappeared.

South Korean retail investors, who were the most important driver of KOSPI in the first half of the year, are undergoing a fundamental shift in their behavior.

A Goldman Sachs report shows that net retail buying shrank sharply in August, falling from a peak of 54.5 trillion won in June to just 5.4 trillion won, a 90% month-on-month decrease . Goldman Sachs attributes this shift to three factors:

In terms of behavior , retail investors have shifted from their previous aggressive buy-on-dips strategy to a more conservative approach of avoiding losses and reducing positions during rebounds.In terms of trading range , Goldman Sachs observed that systematic retail buying activity was concentrated below 6500 points on the KOSPI, and once the index attempted to break through 7000 points, retail investors quickly closed their positions and left the market, forming a clear range-resistance effect.In terms of liquidity , margin deposits held by investors in brokerage accounts have remained below 100 trillion won for a week, indicating that retail investors' available funds are running out.

At the same time, the balance of time deposits at South Korea's top five commercial banks exceeded 1,000 trillion won for the first time, with a total inflow of 55.83 trillion won in July and August, indicating a clear shift of funds towards safe-haven assets.

Furthermore, the leveraged ETF craze that had previously attracted a large number of retail investors has come to an end. Because regulations require investors to complete a five-hour online course to qualify for leveraged trading, a large number of momentum chasers were excluded, and the leveraged ETF bubble subsequently burst.

Corporate buybacks: the only safety net, but the window is about to close.

With retail investors, foreign investors, and local institutions all recording net selling in August, the only net buyers came from the "other companies" category, namely corporate buybacks led by Samsung Electronics and SK Hynix.

Goldman Sachs data shows that on a recent trading day, the share buybacks of the two companies combined contributed approximately $1.2 billion in net purchases, accounting for over 98% of the inflows into the "Other Companies" category that day, and have maintained net purchases for 12 consecutive trading days . It was this sustained buyback support that prevented KOSPI from experiencing a larger decline under selling pressure from multiple sides.

However, this support has a clear time limit. Samsung Electronics and SK Hynix's buyback execution windows expire on November 21 and November 19, respectively, but Goldman Sachs, by tracking the speed of buyback execution, found that due to the two companies' pre-emptive execution strategy, at the current rate of quota consumption, the buyback funds are expected to be exhausted between the end of September and mid-October , about a month earlier than the official deadline.

Goldman Sachs warns that secondary support in the market will then rely again on regular institutional funding flows, but the latter's willingness to participate at current price levels is clearly insufficient, which will expose KOSPI to a significant liquidity vacuum risk.

Foreign Capital Flows and the Korean Won Exchange Rate: Key Variables for the Second Half of the Year

Goldman Sachs believes that with retail buying drying up and the window for corporate buybacks closing, net foreign capital inflows have become the most critical structural variable for the KOSPI's performance in the second half of the year.

Recent trends indicate that net selling pressure from foreign investors has eased somewhat. In May and June, foreign investors net sold 44.7 billion won and 48.6 billion won respectively; however, in July and August, the net selling volume narrowed to approximately 9.9 billion won and 10 billion won, respectively, indicating a significant weakening of selling momentum.

The exchange rate environment is also trending towards a more favorable position. The Korean won has appreciated by 12.9% since its mid-year low , while the USD/KRW exchange rate has fallen from 1561.50 to 1359.15. Although the correlation between the USD/KRW and the KOSPI has recently diverged to some extent, Goldman Sachs believes that a stronger won generally provides more favorable exchange rate conditions for the reallocation of global assets to the Korean stock market.

Goldman Sachs has formulated three execution strategies based on this: reduce holdings near the KOSPI 7000 point level , as retail investors' break-even selling pressure is expected to create significant resistance at that level; position for increased volatility after the October buyback ends ; and closely monitor foreign capital rotation in leading semiconductor stocks to capitalize on structural opportunities arising from the appreciation of the Korean won and the stabilization of net foreign selling.

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