KOSPI Plunges 7% as Middle East Conflict Sparks Foreign Selloff

The escalation of military conflict between the United States and Iran is expected to heighten stock market volatility in the near term, with analysts forecasting the KOSPI index could retreat to the low 5,000s.

Foreign investors have been net sellers on the KOSPI for consecutive sessions recently. With global volatility now expanding, the likelihood of additional foreign capital outflows triggering a correction in the domestic market is increasing.

IBK Investment & Securities said in a report released on the 3rd, "The domestic stock market has surged 48% since the beginning of the year, creating significant technical pressure, and oil prices are spiking, which will dampen short-term investor sentiment." The firm projected that "KOSPI could correct to the mid-to-high 5,000 range in early March as hostilities expand."

Meritz Securities suggested a 5-10% decline in KOSPI is possible within a month, adding that the downturn could extend beyond one month if the conflict spreads or becomes prolonged. LS Securities estimated a potential drop of 10-15% from recent highs, implying KOSPI could fall to the low 5,000s.

Hana Securities noted in its report that "the Middle East crisis originating from Iran is a variable that, in the short term, could trigger KOSPI corrections, foreign net selling of around 500 billion won per day, and push the exchange rate ceiling to 1,480 won."

Kim Doo-eon, a researcher at Hana Securities, said, "The stock market is expected to face downward pressure on the index in the short term. Negative impacts on foreign investor flows in the domestic market, which is sensitive to geopolitical risks and rising international oil prices, are inevitable."

On the 3rd, when KOSPI plunged sharply, foreign investors net sold more than 5 trillion won worth of shares, dragging down the index. Foreign selling totaled 5.18 trillion won for the day. Individual investors net purchased 5.82 trillion won on the main bourse in a single day, but combined with institutional selling, this was insufficient to defend the index floor. KOSPI closed at 5,791.91, down 452.22 points (7.24%) from the previous trading day.

Analysts attribute the concentrated foreign selling to heightened geopolitical risks, surging oil prices, and a sharply higher exchange rate. As concerns over Middle East instability grew, Brent crude futures for May delivery on the ICE Futures Exchange breached $80 per barrel during trading. Combined with the spike in the won-dollar exchange rate, foreign investors had incentive to take profits on domestic equities and rebalance portfolios toward less volatile assets. The won-dollar exchange rate closed at 1,466.1 won on the 3rd, up 26.4 won from the previous day, marking its highest level in about a month since February 6th (1,469.5 won).

However, some suggest the correction may be short-lived, given that improvements in corporate fundamentals have driven the domestic market's rally. A securities industry official said, "War-related risks have often resulted only in short-term index corrections. Considering the possibility of increased production by other oil-producing countries, the market could rebound if the conflict does not become prolonged or worsen."