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An advertisement for U.S. stocks at a securities firm in Seoul. / Yonhap News

South Korean retail investors who expanded their investments in U.S. equities are seeing widening losses in Korean won terms as falling stock prices compound with a strengthening won. Since July, the dollar-based volume-weighted average return for the top five net-purchased stocks stood at -22.0 percent, but tumbled to -32.3 percent when converted into won. Even stocks that posted positive gains in dollar terms slipped into negative territory after factoring in exchange rates, leaving all top 10 net-purchased stocks in the red in won terms. Securities analysts advise that retail investors need to adjust their investment strategies accordingly, as further declines in the exchange rate are expected.

According to the Korea Securities Depository's securities information portal, SEIBro, on the 7th, the won-converted volume-weighted average return for the top five U.S. stocks net purchased by South Korean investors from early July to the 4th of this month stood at -32.3 percent. Over the same period, the won-dollar exchange rate dropped by 215.3 won (13.8 percent), falling from 1,555.8 won to 1,340.5 won, which expanded the loss margin in won terms by 10.3 percentage points compared to the dollar-denominated return of -22.0 percent.

The most purchased security by domestic investors during this timeframe was the Direxion Daily Semiconductor Bull 3X Shares (SOXL), with net purchases reaching 3.01519 billion dollars (approximately 4.07 trillion won). The share price of SOXL dropped 35.4 percent from 181.47 dollars on July 2 to 117.28 dollars on the 4th of this month. Reflecting the exchange rate, the won-based return fell to -44.3 percent, widening the loss margin by an additional 8.9 percentage points.

Stocks that rose in dollar terms also recorded negative returns in won terms. SK Hynix American Depositary Receipts (ADRs) climbed 5.4 percent from 168.01 dollars on their July 10 listing date to 177 dollars on the 4th of this month, but generated a return of -5.9 percent in won terms. Among the top 10 net-purchased stocks, five rose in dollar terms, yet all posted losses when converted to won.

Even as investors increased their holdings of U.S. equities over this period, the value of their holdings actually shrank in won terms. The custody value of U.S. stocks held by domestic investors grew by approximately 6.9 billion dollars, from 183.9 billion dollars on July 2 to 190.8 billion dollars on the 3rd of this month, yet the won-converted amount fell by about 30 trillion won, from 286 trillion won to 256 trillion won. With net purchases of U.S. stocks surging more than sevenfold in July from June to reach 4.6424 billion dollars, the strengthening won ended up dragging down overall investment performance during an era of expanded U.S. equity exposure.

The securities industry leaves open the possibility that the won-dollar exchange rate could fall further into the low 1,300-won range in the near term. However, given that it has already dropped by more than 200 won over the past two months, analysts project that any additional decline will be limited. Consequently, analyses suggest that investors should consider the likelihood of a future currency rebound rather than belatedly initiating currency hedges.

Choi Kyu-ho, an analyst at Hanwha Investment & Securities, noted, "Downward pressure on the won-dollar exchange rate could persist in the near term, but any additional downside is expected to be limited." He added, "Unless engaging in short-term trading, maintaining an unhedged currency exposure is preferable to currency hedging in light of a potential rebound in the exchange rate down the road."

Some point out that the lower exchange rate can instead serve as an investment opportunity. Kim Yong-koo, a researcher at Yuanta Securities, said, "With the won-dollar exchange rate dropping substantially and easing the currency burden on U.S. stock investments, the appeal of investing in AI, semiconductors, and big tech could rise again once U.S. market interest rates stabilize." He added, "Given that earnings momentum remains solid, investors can utilize the current price correction as a dip-buying opportunity."

                                                                                                        Han Hye-seong