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Safe-haven asset the 'only answer' for risk-averse investors amid virus
By Lee Kyung-min
The stock market will continue to experience extreme turbulence brought on by a mass foreign selloff, following global wave to secure what is increasingly becoming the ultimate safe-haven asset ― the U.S. dollar ― finance officials said Sunday.
The pronounced "risk-averse" sentiment has come amid heightened fear of a global recession triggered by the COVID-19 pandemic.
Also sparked by the reduced risk appetite was a surge in demand for the greenback over the past few days here, indicated by a spike in the balance of dollar-denominated deposits at local banks. Market analysts say investors are increasingly betting that the South Korean won will lose further value against the dollar in the coming weeks.
Recent data from the Korea Center for International Finance (KCIF) showed that foreign investors net sold shares valued at $10.24 billion (12.7 trillion won) between Feb.20 and March 18. Feb. 20 is when the coronavirus began to spread rapidly. The figure is the second-largest amount among Asia's economies following Taiwan which saw selling of $13.2 billion.
In terms of the amount of foreign selling, South Korea is followed by India ($7.3 billion), Thailand ($2.05 billion), Indonesia ($620 million), the Philippines ($350 million) and Vietnam ($250 million).
According to the Institute of International Finance (IIF), its capital flows trackers pointed to "an unprecedented shock to nonresident flows to emerging markets" since late January when the COVID-19 outbreak became a global concern.
The trackers, which provide a daily snapshot of nonresident flows to key emerging markets, covers over 20 emerging markets, including China, India, South Africa and Turkey.
"Cumulative capital outflows since the COVID-19 episode began in late January are already twice as large as in the global financial crisis and dwarf stress events such as the China devaluation scare of 2015 and the taper tantrum in 2014," it said.
The severe shock to the local financial market has continued despite the Bank of Korea's decision to sign a $60 billion currency swap deal with the U.S. Federal Reserve.
The government expects the six-month deal will have a similar stabilizing effect to possibly stem the South Korean currency from losing more in value, the same way a previous $30 billion deal in 2008 helped the Korean won stabilize at 1,170 won to the U.S. dollar, from 1,468 won.
The announcement slightly pushed up the local currency to the 1,260 won-range, March. 20, a gain from the previous session when it dropped to as low as 1,296 won.
But it did little to curtail the foreign selloffs, which have continued for 12 consecutive sessions, with the net selloff standing at 585.1 billion won that day.
Up to 40 percent of the net balance of foreign selloffs held in Korean won are exchanged for U.S. dollars on the local foreign currency market, according to a finance ministry official.
"Foreigners' selling is a major factor jacking up the demand for U.S. dollars. We are closely monitoring the market," he said.
The high demand for the safe-haven asset led to a $3.07 billion jump in the balance of deposits held in the U.S. currency in Korea over the past four days.
The deposits are the sum of U.S. dollars held by Koreans, foreign businesses and foreigners that have lived in Korea for over six months.
According to the five leading commercial banks ― KB Kookmin, Shinhan, Woori, Hana and NongHyup ― the balance stood at $43 billion, March 19. The amount jumped $868 million, March 16, and a further $1.42 billion the following day. The increase continued for the next two sessions, $390 million, March 18, and $395 million, March 19.
"Many people are buying the U.S. dollar based on the expectation that it will continue to gain in terms of value against the local currency amid the growing market uncertainty," an industry official said.
