Foreign outflows weigh on KOSPI, but earnings upgrades and record buybacks provide support

Overview

This edition of the Korean market weekly evaluates the KOSPI from the perspectives of market performance, industry earnings revisions, share buybacks, institutional positioning, valuations, and macro and risk indicators. The report shows that volatility in global bond yields and foreign selling are creating near-term pressure, while earnings upgrades, accelerating buybacks and treasury-share cancellations, and valuations near the lower end of their historical range provide countervailing support.

Core views

Korean equities declined modestly this week amid volatility in global bond yields and foreign outflows, with even strong buyback announcements unable to fully offset the pressure. As of August 21, the KOSPI stood at 6,912.95 points, down 0.9% for the week; the KOSDAQ was at 801.94 points, down 7.3%; and the MSCI Korea Index was at 2,581.29 points, up 0.4%. Sector dispersion was pronounced: insurance rose 6.8%, technology gained 1.5%, and retail advanced 1.3%, while machinery, shipbuilding, and automobiles declined 10.4%, 9.9%, and 9.4%, respectively. Foreign investors shifted from buying to selling, with weekly net outflows of KRW 1.851 trillion from the KOSPI, driven primarily by technology-sector outflows. Institutions recorded net outflows of KRW 2.376 trillion, while individual investors made net purchases of KRW 1.941 trillion. Earnings expectations continued to improve. According to the report, KOSPI 12-month forward EPS was revised up 1.4% over the week, with the insurance sector receiving the largest earnings upgrades and the leisure sector the largest downgrades. This created a divergence between fundamental signals and near-term price and fund-flow performance: the index and several cyclical sectors weakened, while aggregate market earnings expectations continued to rise. The report also presents the medium-term trend in industry earnings revisions to assess whether current changes represent a one-week disturbance or more persistent earnings momentum. Share buybacks are the special topic of this edition. SK Hynix announced that it would accelerate its KRW 40 trillion share buyback and cancellation program and raise its shareholder-return commitment to more than 50% of free cash flow. Driven by the announcement, aggregate buybacks in the Korean equity market rose to an all-time high. The report argues that recent buyback measures, together with amendments to the Commercial Act, have accelerated treasury-share cancellations, bringing the value of cancellations to a record high in 2026. Statistics as of July 3, 2026, show that buyback activity in recent years has been driven primarily by the information technology and financial sectors. The report also compares share-price performance following buyback announcements and notes that the median return after recent announcements was stronger than during the preceding three years. Based on FactSet consensus estimates for 2026–2028 and companies' announced shareholder-return policies, the report believes Samsung Electronics and SK Hynix are positioned to offer attractive total shareholder returns in the current and next fiscal years. Regional fund flows remained weak. Hedge fund net selling in Asia was led by Korea and Japan, followed by Taiwan, while net buying in China only partially offset these outflows. Japan remained the only market in the region to receive net buying year to date, while Korea experienced the largest net selling. In the Korean market, long sales reached 1.5 times short sales, indicating that reductions were driven primarily by the unwinding of existing long positions rather than merely the addition of new shorts. Korea's net exposure fell to 4.2%, at the 55th percentile over the past year and the 91st percentile over the past five years. Gross exposure declined to 3.2%, but remained at the 83rd percentile over the past year and the 97th percentile over the past five years. Mutual fund positioning showed a state of “still underweight, but increasing exposure at the margin.” According to preliminary EPFR data from July, when approximately 60% of total assets under management had reported, Asia funds remained underweight Korea but increased their exposure to Korea relative to the benchmark by the largest amount. Emerging market funds were also underweight Korea, with an allocation deviation of -135 basis points, but increased their Korea allocations by 80 basis points over the past month, the largest increase among all markets. Over the same period, funds reduced exposure to Taiwan and China. Thus, longer-term positioning remained low, while the direction of active adjustments improved over the most recent month. Valuation data show that the Korean market remained near the lower end of its historical range. As of August 21, the KOSPI's 12-month forward P/E was 5.6x, below its 10.0x average since 2006 and also below the one-standard-deviation-below-mean level of 8.7x. The historical low, one-standard-deviation-above-mean level, and historical high were 5.1x, 11.2x, and 14.6x, respectively. The P/E based on 2026 earnings was 5.3x. Industry differences were substantial. For example, the technology sector's current 12-month forward P/E was 4.6x versus a historical average of 10.6x, while the leisure sector traded at 11.7x versus a historical average of 21.0x. The machinery sector, by contrast, traded at 28.3x, above its historical average of 15.0x. The report also assesses the Korean market's relative valuation discount against the MSCI World Index, the Asia ex-Japan Index, and industries' ten-year historical ranges, but does not treat low valuation alone as a near-term price catalyst. Cross-asset indicators reflected the coexistence of currency appreciation and weaker risk appetite. According to the report's table, the Korean won appreciated 2.2%, 1.9%, and 1.1% against the US dollar, Japanese yen, and euro, respectively, over the week, with USDKRW at 1,385. Korean three-year and ten-year government bond yields both rose by 6 basis points, reaching 3.85% and 4.38%, respectively. The latest Korean Equity Risk Barometer, GSSRKERB, fell to -0.7 and entered risk-off territory, indicating that the stronger won and earnings upgrades had not yet translated into a broad improvement in market risk appetite. The report lists a 2026 12-month KOSPI target of 12,000 points, but does not provide a rating or any target revision action in the main text.

Analysis framework

The report first assesses market performance using weekly index returns, relative industry performance, and fund flows by investor category, and then examines 12-month forward EPS and industry earnings revisions. It subsequently uses the SK Hynix buyback event as a starting point to compare market-wide buybacks, treasury-share cancellations, and historical post-announcement returns, while evaluating Samsung Electronics and SK Hynix through free cash flow and shareholder-return policies. The institutional behavior section uses hedge fund trading data and EPFR active fund positioning to distinguish the current degree of underweight positioning from marginal changes over the past month. Finally, the report places current P/E ratios within long-term historical ranges and combines exchange rates, government bond yields, and its internal risk barometer to assess the market environment.

Methodology notes

• Event Strategy and Behavioral FinanceEvent-driven analysis

  Buyback Announcement Event Analysis

  The report uses the SK Hynix buyback announcement as the triggering event, examines changes in market-wide buybacks and treasury-share cancellations, and compares median returns following recent announcements with those of the preceding three years.

• Event Strategy and Behavioral FinanceFund Flow/Positioning Analysis

  Hedge Fund Trading Flows and Mutual Fund Positioning Relative to Benchmarks

  The report separately examines long sales, short transactions, net exposure, gross exposure, and active funds' overweight or underweight positions to assess institutional positioning levels and the direction of marginal adjustments.

• Valuation methodsP/E and PEG Valuation

  12-Month Forward P/E and Historical Range Comparison

  The report compares the current 12-month forward P/E ratios of the KOSPI and its industries with long-term averages, standard-deviation ranges, and global and Asian regional markets to characterize their valuation positions.

• Corporate Fundamentals and Financial FrameworksFree cash flow analysis

  Free Cash Flow and Total Shareholder Return

  The report combines companies' commitments to use free cash flow for buybacks, cancellations, and other shareholder returns to assess Samsung Electronics' and SK Hynix's capacity to deliver total shareholder returns in the current and next fiscal years.

• (Out-of-Vocabulary Method)

  Earnings Revision Momentum Analysis

  The report tracks the weekly change in KOSPI 12-month forward EPS and the magnitude of earnings upgrades and downgrades across industries to identify the direction of fundamental expectations and industry divergence.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Korean Equity Market (KOSPI)

  The report's core research subject, affected in the near term by volatility in global bond yields, foreign outflows, and declining risk appetite.

  Strengths

  12-month forward EPS was revised up 1.4% over the week, buybacks and treasury-share cancellations reached record levels, and the 12-month forward P/E is below its long-term average.

  Weaknesses

  The index declined 0.9% over the week, foreign investors recorded net outflows of KRW 1.851 trillion, and Korea saw the largest hedge fund net selling in the region.

  Comparison

  Japan is the only market in the region to receive net hedge fund buying year to date, while Korea saw the largest net selling. The report also compares Korea's valuation discount relative to global and Asia ex-Japan markets.

  Risks

  Volatility in global bond yields, sustained foreign outflows, and risk indicators remaining in risk-off territory.

• SK Hynix

  Its buyback announcement is the principal catalyst for this edition's market buyback theme.

  Strengths

  It plans to accelerate its KRW 40 trillion share buyback and cancellation program and raise its shareholder-return commitment to more than 50% of free cash flow. The report believes it has the potential to deliver attractive total shareholder returns in the current and next fiscal years.

  Comparison

  Together with Samsung Electronics, it is identified as a company positioned to deliver strong total shareholder returns in the current and next fiscal years.

• Samsung Electronics

  The report analyzes it alongside SK Hynix in terms of free cash flow and total shareholder return.

  Strengths

  Based on consensus estimates and announced shareholder-return policies, the report considers its total shareholder returns in the current and next fiscal years attractive.

  Comparison

  Together with SK Hynix, it forms the report's case study of shareholder returns among large Korean technology companies.

Key data

• KOSPI6,912.95 points; -0.9% for the weekAs of August 21
• KOSDAQ801.94 points; -7.3% for the weekThe weekly decline was significantly larger than that of the KOSPI
• MSCI Korea Index2,581.29 points; +0.4% for the weekIn Korean won terms
• Weekly Industry PerformanceInsurance +6.8%, technology +1.5%, retail +1.3%; machinery -10.4%, shipbuilding -9.9%, automobiles -9.4%Pronounced divergence in relative performance
• KOSPI 12-Month Forward EPS Revision+1.4%Revised up over the week; insurance received the strongest upgrades and leisure the largest downgrades
• Foreign Flows into the KOSPI-KRW 1.851 trillionWeekly net outflow, driven primarily by technology-sector outflows
• SK Hynix Buyback PlanKRW 40 trillionPlans to accelerate share buybacks and cancellations
• SK Hynix Shareholder-Return CommitmentMore than 50% of free cash flowThe core policy basis for the buyback theme
• Korea Hedge Fund Net Exposure4.2%55th percentile over the past year and 91st percentile over the past five years
• Korea Hedge Fund Gross Exposure3.2%83rd percentile over the past year and 97th percentile over the past five years
• Ratio of Long to Short Sales in Korea1.5 to 1Long sales exceeded short sales
• Emerging Market Fund Allocation to KoreaUnderweight by 135 basis points; increased by 80 basis points over one monthStill underweight, but recorded the largest allocation increase over the past month
• USDKRW1,385; -2.2% for the weekCorresponding to a 2.2% appreciation of the Korean won against the US dollar
• Korean Government Bond Yields3-year 3.85%, 10-year 4.38%Both rose by 6 basis points over the week
• Korean Equity Risk Barometer-0.7Entered risk-off territory
• KOSPI 12-Month Forward P/E5.6xHistorical average of 10.0x and one-standard-deviation-below-mean level of 8.7x
• KOSPI 12-Month Target12,000 pointsThe 2026 target listed in the report's macro and market outlook table

Impact & implications

The core implication of the report is that the Korean equity market remains constrained in the near term by volatility in global interest rates, foreign investor withdrawals, and institutional position reductions, while the risk barometer also confirms that the market is in a risk-off state. However, fundamental and capital-return signals have not deteriorated in tandem. KOSPI earnings expectations continue to be revised upward, Korean corporate buybacks and treasury-share cancellations have reached record levels, and active funds, though still underweight Korea, have begun increasing exposure at the margin. P/E ratios below historical averages further indicate a disconnect between current valuations and improving earnings, but the report does not issue a new rating action on this basis.

Risks

• Volatility in global bond yields and foreign outflows were clear sources of volatility in the Korean equity market this week.
• Foreign outflows from the KOSPI technology sector and continued hedge fund net selling reflect weak institutional risk tolerance.
• The Korean Equity Risk Barometer fell to -0.7 and entered risk-off territory.

What to watch

• Track the execution of SK Hynix's KRW 40 trillion buyback and cancellation plan and the implementation of its commitment to return more than 50% of free cash flow to shareholders.
• Monitor whether Korean companies continue to accelerate treasury-share cancellations following amendments to the Commercial Act.
• Track foreign investor flows into the KOSPI technology sector and whether hedge fund reductions in long positions slow.
• Monitor whether the marginal shift by Asia and emerging market funds from underweighting Korea toward increasing allocations can continue.
• Track KOSPI EPS revisions and divergence in earnings expectations across industries such as insurance and leisure.
• Monitor subsequent changes in global bond yields, the Korean won exchange rate, and the Korean Equity Risk Barometer.