Asia rally holds despite foreign selling

FOREIGNERS are selling Asian equities at a record pace despite the region’s fervid rally. Ordinarily, that would signal trouble ahead – but this time around, it might be merely a speed bump.

Foreign institutional investors have sold an unprecedented US$134bil of emerging Asian equities in 2026 through June 12, according to regional stock-exchange data, including US$78bil in South Korea, US$31bil in India and US$22bil in Taiwan.

That already dwarfs the more than US$45bil sold in all of 2025.

The divergence between flows and performance is sharpest in North Asia, where Korea’s Kospi has soared more than 88.5% and Taiwan’s Taiex has risen over 50% through last Friday.

Never has the selling been so large or so concentrated, even during the 2008-2009 global financial crisis.

The runner-up was 2022, when Russia’s invasion of Ukraine, energy shocks, the US Federal Reserve tightening and China-growth worries drove US$52bil of foreign selling – less than half the amount sold so far this year.

The reasons for the selloff vary by market. They are most obvious in India: sluggish earnings growth, elevated valuations and a weak currency.

South Korea and Taiwan, by contrast, have partly been victims of their own success: Spectacular technology rallies have lifted portfolio weights so far that some foreign funds appear to have been forced to trim exposure to manage concentration risk.

Rebalancing act

The rebalancing dynamic is clearest in South Korea, where two of the most heavily sold stocks – Samsung Electronics and SK Hynix – are also among the market’s best performers, according to data from the Korea Exchange. So far this year, their shares have risen around 151% and 218% respectively.

Consider a hypothetical investor who held Samsung and SK Hynix at their combined benchmark weight of 8.6% in the MSCI Asia ex-Japan index at the start of 2026. Left untrimmed, and assuming the rest of the portfolio stayed flat, those two positions would have swelled to 21.5% of total assets year-to-date (y-t-d).

This degree of concentration would breach many institutional risk limits and force trimming, including exposure to the Kospi itself given the high weighting of these two stocks.

European UCITS rules, for example, generally cap exposure to a single stock at 10%.

A similar pressure is visible in Taiwan, where foreigners have sold a net US$37bil of Taiwan Semiconductor Manufacturing Co y-t-d, according to the Taiwan Stock Exchange, as a 47% share-price jump kept concentration risk high, while redeploying into other technology stocks.

Some of the selling likely also reflects profit-taking after outsized gains, reallocation toward developed markets and concerns about the artificial intelligence (AI)-led semiconductor cycle.

This all raises a key question: What is driving these markets higher despite record foreign outflows?

Sustained rallies require fresh capital – and that is being provided by domestic investors.

Domestic frenzy

Domestic investor enthusiasm has long supported the Indian market, but it is a more recent phenomenon in North Asia.

Taiwanese mutual funds have bought US$11bil y-t-d, up from US$3.2bil in 2025, while South Korean institutional and retail buying has hit US$77bil, versus US$1.4bil in 2024 and net sales of US$710mil in 2025.

Remarkably, South Korean investors have absorbed the foreign selling almost dollar for dollar.

Where foreigners have dumped blue chips, locals have treated the dip as a buying opportunity.

Will foreign money return to Asia? The fundamental case – underpinned by AI capital expenditure – points to yes for North Asia.

India is harder to call. The rupee remains weak, earnings growth has disappointed, and unlike Korea or Taiwan, India has no equivalent AI-driven catalyst to pull foreign capital back in.

Oversold and under-owned

Importantly, positioning itself could also trigger a reversal: markets can become so oversold that even modest improvements in sentiment trigger aggressive foreign buying.

There are multiple ways to gauge positioning. One is to measure six-month cumulative net buying or selling by overseas investors as a share of market capitalisation, using regional stock-exchange data.

Used primarily for emerging markets, this method has reliably flagged ownership extremes over the past two decades, including around the prolonged global financial crisis selloff in South Korea and Taiwan.

By this measure, the South Korean market is oversold. Foreigners have historically returned as buyers once six-month cumulative selling hits 1.4% to 1.5% of market cap. At 1.44%, Korea is squarely in that zone.

Taiwan is more neutral: historical oversold bottoms have typically required cumulative six-month foreign selling of 1.3% to 2% of market cap, far above the current 0.25%, so positioning does not yet send the same contrarian signal.

India is not yet oversold but is getting there. The typical oversold range is 0.4% to 0.5%, though selling ran deeper in the post-pandemic period of 2021 to 2022.

At 0.6%, and with currency pressure elevated, the market warrants close watching.

Can it continue?

A continued bull run is not guaranteed, of course. Several warning signs are flashing in South Korea: domestic investors’ margin loans have more than doubled since the beginning of last year, while a surge in leveraged exchange-traded fund trading has drawn the regulator’s attention.

On top of this, the energy-price spike from the prolonged United States-Israeli war with Iran poses a major risk to oil-importing Asian economies and could deter foreign investment even in heavily under-owned markets.

For now, the AI frenzy, domestic exuberance and the underlying strength of North Asia’s tech champions may be enough to offset foreign selling – but whether that can hold is an open question. — Reuters