Korea Leads Foreign Outflows from Asia, with Buying in China Only Partially Offsetting North Asian Selling

Overview

This report tracks foreign, local institutional, Stock Connect, retail, and fund flows in global and emerging market equities, while using Goldman Sachs Prime Services and EPFR data to assess hedge fund and mutual fund positioning. Its central conclusion is that global fund subscriptions remained strong during the week, but North Asian markets faced foreign-investor and hedge-fund selling pressure led by Korea; Chinese equities attracted some buying, but this has not yet reversed their underallocated status.

Core views

In terms of foreign flows, Emerging Asia ex-China recorded US$1.5bn of outflows during the week, driven mainly by US$1.6bn of outflows from Korea; non-Asian emerging markets saw approximately US$0.7bn of selling over the same period, including US$0.4bn of outflows from Brazil. Over a longer observation period, foreign investors have recently sold a cumulative net US$122bn in emerging markets ex-China, after purchasing US$19bn since the April lows; in Emerging Asia ex-China, they recently sold a cumulative US$110bn, after purchasing US$16bn since the March lows. Since 2026, cumulative foreign outflows from Emerging Asia ex-China have reached US$171bn, with Korea recording US$103bn of outflows, the greatest selling pressure in the region. By comparison, Japan has received cumulative foreign buying of US$63.3bn, while cumulative Southbound inflows have reached approximately US$46.3bn. Stock Connect flows reversed during the week: Southbound flows recorded US$1.5bn of outflows, but cumulative YTD inflows remained approximately US$46bn. At the individual-stock level, the leading Southbound net purchases during the week were Alibaba Group 9988.HK at US$636mn, SMIC 0981.HK at US$267mn, and Zhipu 2513.HK at US$232mn. Major net sales included Hua Hong Semiconductor 1347.HK at US$454mn, Xiaomi Group 1810.HK at US$195mn, and CSPC Pharmaceutical Group 1093.HK at US$139mn. The three largest Southbound holdings by market value were Tencent Holdings 0700.HK at US$60.553bn, China Construction Bank 0939.HK at US$41.734bn, and Industrial and Commercial Bank of China 1398.HK at US$33.424bn. The report also notes that Hong Kong Exchanges and Clearing no longer discloses aggregate or individual-stock Northbound buying and selling data, so the Northbound section relies primarily on information such as turnover. Demand for global equity funds remained strong, with net inflows of US$40bn during the week, significantly above the previous week's US$16bn. Among developed markets, US funds recorded net purchases of US$28.9bn, Europe saw a modest US$0.2bn inflow, and Japan recorded US$1.7bn of outflows. Emerging markets diverged: GEM funds received US$2.1bn during the week, bringing cumulative YTD inflows to US$61bn, while Asia ex-Japan funds recorded US$2.2bn of outflows. Including country-specific funds, emerging market funds received approximately US$91bn in aggregate over the past eight weeks, driven mainly by approximately US$39bn from China, US$24bn from Korea, and US$19bn from Taiwan; the annualized pace of buying by GEM funds reached its fastest level in the past two decades. On the other hand, sector flow data show that since February 27 as presented in the report, technology hardware and semiconductors and banks saw the largest outflows from GEM and Asia ex-Japan funds, followed by insurance and other financial sectors. Goldman Sachs Prime Services data show that Asia fundamental long/short funds significantly deleveraged in August MTD. Gross leverage fell 14.5 percentage points MTD to 181.0%, the lowest level in more than a year and the 43rd percentile over the past five years. Net leverage remained range-bound, ending the period at 59.3%, the 59th percentile over one year and the 82nd percentile over five years. This indicates that managers primarily reduced overall positions on both the long and short sides rather than cutting net directional exposure by the same magnitude. Net selling during the month was led by Korea and Japan, followed by Taiwan, while buying in China only partially offset North Asian selling. On a YTD basis, Japan was the only market in the region net bought by hedge funds, while Korea experienced the most net selling. After a sharp decline in July, hedge funds' net allocation to Asia was broadly unchanged at 28.5% in August MTD, still 11.7% overweight relative to the MSCI World benchmark, although the extent of the overweight had narrowed considerably from approximately 20% around mid-June. Buying of Chinese equities accelerated MTD, with both A-shares and H-shares contributing to purchases, although A-shares also led the reduction in gross positions. Despite the recent shift to buying, net allocation to Chinese equities remained near its lowest level in the past five years. Therefore, near-term marginal improvement in flows coexists with medium-term underallocation, and the MTD buying alone is not sufficient to conclude that positioning has recovered. Long selling and short selling in Taiwan contributed roughly equally, with net allocation broadly unchanged at 6.2%, the 64th percentile over one year and the 93rd percentile over five years. Gross allocation rose slightly to 4.3%, the 82nd percentile over one year and the 97th percentile over five years. Korea showed clearer risk reduction, with long selling 1.5 times the magnitude of short selling. Net allocation fell to 4.2%, the 55th percentile over one year and the 91st percentile over five years; gross allocation declined to 3.2%, but remained at the 83rd percentile over one year and the 97th percentile over five years. This indicates that although Korea has experienced concentrated position reductions, its allocation level remains relatively high compared with longer-term history. For mutual funds, preliminary July EPFR data cover only approximately 60% of total assets and may be revised as more funds report. Asia funds were most overweight China, Singapore, and Hong Kong, China, and most underweight Taiwan and India; in July, they increased exposure to Korea relative to the benchmark while reducing exposure to Taiwan and China. Broader emerging market funds were most overweight Brazil and Mexico and most underweight Taiwan and India; Taiwan experienced the largest allocation reduction over both the past one month and three months. At the sector level, funds were most overweight China industrials and Brazil energy, and most underweight North Asian technology hardware and semiconductors and banks in China and Taiwan; Taiwan technology saw the largest allocation reduction over both the past one month and three months. These findings are based on approximately 350 actively managed Asia ex-Japan and emerging market funds. Local institutional and retail flows moved in different directions. Local institutions in Asian markets recorded US$1.8bn of outflows during the week, mainly comprising US$2.1bn of outflows from Korea and US$1.4bn from Taiwan. Local institutions in non-Asian emerging markets recorded US$0.6bn of inflows, including US$0.4bn into Brazil. Since 2026, India has been the market with the greatest local institutional buying, at US$57bn. On the retail side, Korea received US$2.5bn and Taiwan US$0.1bn during the week, while cumulative YTD retail inflows into Asian markets reached US$64bn, indicating that domestic retail buying partially absorbed simultaneous selling in Korea by foreign investors and hedge funds. North Asian leverage indicators show that Korean leveraged ETF assets fell to US$22bn and Taiwan's to approximately US$13bn, equivalent to about 0.8% and 0.4% of their respective local free-float market capitalizations. The report explicitly notes that daily rebalancing by leveraged ETFs may amplify intraday volatility, particularly in Korea. Meanwhile, the absolute level of margin financing balances in North Asian markets reached a record amid strong equity-market performance, but remained moderate relative to free-float market capitalization, while regulatory and margin restrictions also constrained further leverage expansion.

Analysis framework

The report first compares weekly, MTD, and YTD changes in foreign, local institutional, Southbound and Northbound Stock Connect, and retail flows, and then contrasts these actual flows with subscriptions and redemptions in global active and passive equity funds. It subsequently uses Goldman Sachs Prime Services data to break down hedge funds' gross leverage, net leverage, regional net allocation, and long and short selling by market, while using one-year and five-year historical percentiles to assess current positioning. The mutual fund section uses preliminary EPFR data to rank country and sector overweights or underweights relative to benchmarks, and finally combines leveraged ETFs, margin financing balances, and risk barometers to assess market crowding and potential volatility transmission.

Methodology notes

• Event-Driven Strategies and Behavioral FinanceFund Flow/Positioning Analysis

  Multi-Channel Equity Flow Monitoring

  The report simultaneously tracks foreign investors, local institutions, Stock Connect, retail investors, and fund subscriptions and redemptions to determine which markets different investor groups are buying or selling and to identify offsetting or reinforcing flow directions.

• Quantitative/Factor/Portfolio Theory

  Gross Leverage, Net Leverage, and Net Allocation Analysis

  Gross leverage measures the overall size of long and short positions, while net leverage reflects directional exposure after deducting short positions. The report uses changes in both to distinguish broad position reductions from a simple decrease in directional risk.

• Quantitative/Factor/Portfolio Theory

  Benchmark-Relative Overweights, Underweights, and Historical Percentiles

  The report compares funds' country and sector allocations with benchmark weights and uses one-year and five-year historical percentiles to describe the current position within historical ranges, thereby identifying relatively crowded or underallocated markets.

• Quantitative/Factor/Portfolio Theory

  Leveraged ETF Assets as a Percentage of Free-Float Market Capitalization

  The report divides leveraged ETF assets by free-float market capitalization to measure their size relative to market capacity and uses this ratio to assess the potential impact of daily rebalancing trades on intraday volatility.

Asset mapping & comparison

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

• Korean Equities

  Foreign investors sold US$1.6bn during the week, leading selling pressure in Asia; Korea also saw the most pronounced hedge fund position reductions MTD, although local retail investors bought US$2.5bn during the week.

  Strengths

  Domestic retail funds provided support during the week; Asia mutual funds increased their Korea exposure relative to the benchmark in July.

  Weaknesses

  Cumulative foreign outflows since 2026 reached approximately US$103bn, the largest among markets covered by the report; hedge fund net allocation fell to 4.2%.

  Comparison

  Korea was the market with the greatest YTD net selling by regional hedge funds, while Japan was the only market with net buying.

  Risks

  Daily rebalancing by leveraged ETFs may amplify intraday volatility, with the report highlighting a more pronounced impact in Korea.

• China A-Shares and H-Shares

  Buying rebounded in August MTD, with both A-shares and H-shares contributing to purchases and partially offsetting North Asian selling.

  Strengths

  China-related funds received approximately US$39bn over the past eight weeks; Asia mutual funds remained overweight China.

  Weaknesses

  Hedge funds' net allocation to Chinese equities remained near its lowest level in the past five years, and A-shares led the reduction in gross positions.

  Comparison

  China saw buying MTD, while Korea, Japan, and Taiwan experienced overall net selling by hedge funds.

• Taiwan Equities

  Retail investors bought modestly during the week, but mutual funds continued to reduce allocations, while hedge fund long and short selling contributed roughly equally.

  Strengths

  Retail inflows totaled US$0.1bn during the week; hedge fund net allocation remained at 6.2%.

  Weaknesses

  Emerging market funds were most underweight Taiwan, which experienced the largest allocation reductions over both the past one month and three months, while Taiwan technology saw the largest position reduction.

  Comparison

  Positioning pressure in Taiwan was less concentrated than the selling in Korea, but the degree of mutual fund underweighting was more pronounced.

  Risks

  Daily rebalancing by leveraged ETFs may amplify intraday volatility.

• Japanese Equities

  Japanese equity funds recorded US$1.7bn of outflows during the week, and hedge funds were net sellers MTD, but cumulative foreign buying since 2026 reached US$63.3bn.

  Strengths

  Japan was the only Asian market net bought by hedge funds YTD and the Asian market with the greatest foreign buying since 2026.

  Weaknesses

  Equity funds recorded outflows during the week, and hedge funds participated in net selling in August MTD.

  Comparison

  Its annual foreign flow trend was significantly stronger than Korea's, but short-term fund flows weakened.

• Brazilian Equities

  Foreign investors sold US$0.4bn during the week, but local institutions purchased US$0.4bn, while mutual funds remained overweight Brazil.

  Strengths

  Cumulative foreign purchases since 2026 reached US$2.8bn, the highest among emerging markets; Brazil energy was one of the sectors most overweighted by funds.

  Weaknesses

  Foreign investors turned net sellers during the week.

  Comparison

  Brazil and Mexico were the emerging markets most overweighted by funds, while Taiwan and India were the most underweighted.

• GEM Equity Funds

  They received US$2.1bn during the week, bringing cumulative YTD inflows to US$61bn.

  Strengths

  The annual pace of buying was the fastest in the past two decades, indicating strong subscriptions into broad emerging market funds.

  Weaknesses

  Sector flows remained concentrated in outflows from technology hardware and semiconductors, banks, and other financial sectors.

  Comparison

  GEM funds received inflows during the week, while Asia ex-Japan funds recorded US$2.2bn of outflows.

• Alibaba Group (9988.HK)

  Southbound net buying totaled US$636mn during the week, the largest net purchase in the table.

  Strengths

  It also ranked among the largest Southbound holdings by market value, with a holding value of US$31.819bn.

  Comparison

  Net buying during the week exceeded SMIC's US$267mn and Zhipu's US$232mn.

• Hua Hong Semiconductor (1347.HK)

  Southbound net selling totaled US$454mn during the week, the largest net sale in the table.

  Weaknesses

  It experienced the most significant Southbound selling during the week.

  Comparison

  Net selling exceeded Xiaomi Group's US$195mn and CSPC Pharmaceutical Group's US$139mn.

Key data

• Weekly Foreign Flow in Emerging Asia ex-China-US$1.5bnDriven mainly by Korea at -US$1.6bn
• Weekly Foreign Flow in Non-Asian Emerging MarketsApproximately -US$0.7bnBrazil contributed -US$0.4bn
• Weekly Southbound Flow-US$1.5bnCumulative YTD inflows of approximately US$46bn
• Weekly Global Equity Fund Flow+US$40bn+US$16bn in the previous week
• Weekly US Equity Fund Flow+US$28.9bnMain source of developed-market inflows
• Weekly GEM Fund Flow+US$2.1bnCumulative YTD inflows of +US$61bn
• Emerging Market Fund Flows over the Past Eight WeeksApproximately +US$91bnChina approximately +US$39bn, Korea approximately +US$24bn, and Taiwan approximately +US$19bn
• Gross Leverage of Asia Fundamental Long/Short Funds181.0%Down 14.5 percentage points in August MTD, the lowest level in more than a year
• Net Leverage of Asia Fundamental Long/Short Funds59.3%59th percentile over one year and 82nd percentile over five years
• Hedge Fund Net Allocation to Asia28.5%11.7% overweight relative to MSCI World, versus approximately 20% overweight around mid-June
• Hedge Fund Net Allocation to Taiwan6.2%64th percentile over one year and 93rd percentile over five years
• Hedge Fund Net Allocation to Korea4.2%Long selling was 1.5 times short selling
• YTD Retail Inflows into Asian MarketsUS$64bnKorea +US$2.5bn and Taiwan +US$0.1bn during the week
• Korean and Taiwanese Leveraged ETF AssetsUS$22bn; approximately US$13bnApproximately 0.8% and 0.4% of free-float market capitalization, respectively
• Largest Southbound Net Purchase during the WeekAlibaba Group +US$636mnFollowed by SMIC at +US$267mn and Zhipu at +US$232mn
• Largest Southbound Net Sale during the WeekHua Hong Semiconductor -US$454mnFollowed by Xiaomi Group at -US$195mn and CSPC Pharmaceutical Group at -US$139mn

Impact & implications

The flow structure presented in the report is not unidirectional: subscriptions into global equity funds and GEM funds were strong, and Chinese equities also saw marginal buying MTD, but foreign investors and hedge funds continued to concentrate position reductions in Korea, Japan, and Taiwan, while Southbound flows turned negative during the week. China's allocation remained near a five-year low, and Asia's overweight relative to the global benchmark narrowed significantly, suggesting that recent buying represents marginal improvement rather than a comprehensive positioning recovery in Goldman Sachs' data. Korea simultaneously experienced selling by foreign investors and hedge funds, domestic retail absorption, and relatively high exposure to leveraged instruments, and this divergence in flows may increase short-term volatility.

Risks

• Daily rebalancing by leveraged ETFs in Korea and Taiwan may amplify intraday volatility, with Korea particularly affected.
• July mutual fund positioning conclusions are based on preliminary EPFR data covering approximately 60% of total assets and may be revised as more funds report.
• Hong Kong Exchanges and Clearing no longer discloses aggregate or individual-stock Northbound buying and selling data, limiting direct observation of Northbound net flows.

What to watch

• Track whether selling in Korea by foreign investors and hedge funds continues and whether retail funds can continue to absorb it.
• Monitor whether buying of China A-shares and H-shares can lift net allocation from its five-year low.
• Watch whether Southbound flows resume net inflows after US$1.5bn of outflows during the week.
• Track subsequent changes in gross leverage among Asia fundamental long/short funds and the extent of their overweight relative to MSCI World.
• Watch whether the conclusions regarding underweight positions in Taiwan, India, and North Asian technology are revised after the release of complete EPFR data.
• Monitor the impact of Korean leveraged ETF assets, margin financing balances, and daily rebalancing trades on intraday volatility.