Foreign Capital Expiration, Retail Investors Taking Over – Goldman Sachs: Local Capital is Becoming New Pricing Power in Asian Stocks

This year, Asian stock markets have been impressive, but the main drivers behind this rally are not the commonly perceived foreign institutional funds, but increasingly active local retail investors. Goldman Sachs points out in its latest report that local individual investors are becoming an increasingly important force in the marginal pricing of the market.

The contrast in capital flows between the South Korean and Japanese markets makes this trend particularly clear. The South Korean stock market has risen by 82% year-to-date, while foreign capital has net sold about $62 billion in the same period; the Japanese market has also shown significant strength, but in the opposite direction, with an inflow of about $66 billion of overseas capital. Foreign capital behaviors are completely contrary, yet both markets are bullish - there is only one common explanation: local retail investors continue to enter the market.

Goldman Sachs data shows that since the end of February, South Korean retail investors have cumulatively net bought about $35 billion worth of stocks, and the inflow of local ETFs in the same period has also reached about $35 billion, basically offsetting the continuous selling of foreign capital. More notably, the channels of retail investor participation have expanded from traditional spot markets to ETFs, stock index futures, and individual stock futures, with increasingly diverse sources of funds - this means that local funds are no longer just passively "taking on the baton," but are increasingly taking the initiative in leading market direction.

Regarding the massive outflow of foreign capital from the South Korean market, Goldman Sachs does not believe this is a systemic bearish signal. The report points out that the capital outflow is mainly concentrated in a few weight stocks, not a broad sell-off across the market; at the same time, Goldman Sachs Prime Services data shows that hedge funds are still increasing their positions in South Korea and other North Asian markets. In Goldman's view, this foreign capital reduction is more like a routine rebalancing based on index weights by long-term capital, rather than an active avoidance of regional prospects.

As the market continues to rise, whether retail sentiment has overheated is the most worrying issue for investors. Goldman acknowledges that the margin balance in North Asian markets has risen to a historical high, and the scale of leveraged ETFs has also expanded significantly - in South Korea alone, the size of leveraged ETF assets has reached about $30 billion. However, the firm also emphasizes that the proportion of margin balance to free-floating market capitalization has not yet reached historical extreme levels, and strict financing and margin control systems in the region also constrain the expansion of leverage; current leverage risks are still controllable and not sufficient to cause a systemic crisis.

Looking at a broader market participation, Goldman's retail sentiment index also shows a positive signal: over the past year, the number of new accounts in North Asian markets has grown significantly, and small-cap stock turnover rates have noticeably improved, with particularly high participation in the South Korean market, and positive sentiments in Japan and China markets. New accounts, trading activity, and continuous capital inflows together form the underlying logic that supports the market.

Based on the above judgment, Goldman maintains a positive view of North Asian markets, overweighting South Korea, Japan, and China in terms of allocation, and clearly states that it prefers A-shares to Hong Kong H-shares.