Oil-producing nations retreat from Korean, Japanese stocks

[SINGAPORE] Struggling to fill the hole in revenues left by the plunge in the oil price, investors from the world's major oil producing countries were among the biggest sellers of South Korean stocks over the past year.

Crude oil prices have slumped more than 70 per cent since mid-2014, in line with a decline in broader commodity markets, taking oil to a 12-year low of US$27.10 last month.

According to an official from South Korea's Financial Supervisory Service (FSS), investors from oil exporting nations cut their holdings in South Korean stocks last year, with intense selling of shares picking up in June and continuing into January.

Analysts say sovereign wealth funds are likely to be among the bigger sellers of Korean stocks and suspect the same investors are behind outflows seen in Japan in January.

"Oil money is flowing out as oil producing countries'deteriorating trade balances due to the low oil prices worsen their fiscal balances. They cannot quickly cut fiscal spending,"said Kim Jae Eun, Standard Chartered Bank's economist for investment advisory and strategy, in Seoul.

The data from South Korea's regulator aligns with a wider retreat by oil-rich investors that is believed to be partly behind the recent selloff in global stocks.

The official from the FSS, who did not want to be named, said investors from Saudi Arabia, Norway and the United Arab Emirates dumped a combined net 5.6 trillion won (S$6.5 billion) worth of Seoul stocks from June through the end of 2015. That compared with the country's total stock outflows in 2015 of 3.5 trillion won.

Saudi Arabia, the world's top crude producer, was the largest seller during those months, unloading a combined net 4.4 trillion won in equities during the period, while Norway sold 1 trillion won.

In January, Saudi Arabia sold a net 117.5 billion won worth of South Korean equities.

Those from Norway offloaded a net 62 billion won in stocks last month. The European oil exporter has the world's largest sovereign wealth fund, worth more than US$810 billion.

JAPAN TOO

While a directly comparable breakdown of investments in other Asian markets is not available, investors of oil-producing countries have also been seen pulling out of Japanese stocks.

Portfolio inflows data from Japan's finance ministry shows Norwegian investors sold a net 40.6 billion yen (S$500 million) of Japanese stocks in 2015.

Possibly not reflected in official numbers are investor flows routed through financial centres such as London.

Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, said active selling of Japanese cash equities by foreigners in January points to liquidation by overseas real money investors, possibly sovereign wealth funds.

Japanese stock exchange data showed selling of cash equities by foreigners in January made up a larger-than-usual proportion of total foreign stock selling, at 48 per cent.

Mr Fujito says this suggests overseas investors were increasingly offloading real-money investments rather than more speculative stock instruments, such as futures. Such a phenomenon was also observed in August and September of last year. "I think there is a very strong possibility that oil-producing countries are linked to such moves," Fujito said.

REUTERS