The record-setting rally in South Korean stocks has nearly closed the window for the National Pension Service (NPS) to buy additional domestic shares, a shift that could slow the market’s bull run toward 5,000 points.
The South Korean pension scheme’s holdings of domestic equities account for 17.5% of its assets under management (AUM) as of Nov. 5, near its upper ceiling of 17.9%, according to people familiar with the matteron Thursday.
That marked a sharp rise from last year’s 11.5%.
Under this year’s strategic allocation target, the ceiling for domestic equities is set at 14.9%, with flexibility to rise to 17.9% or fall to 11.9%.
Following the Kospi’s surge past 4,000 points last month, marking uncharted territory for South Korea’s stock market, the weighting of domestic stocks climbed to 17% this month.
Under its medium-term allocationplan, the pension fund plans to trim its exposure to domestic equities by 0.5 percentage point each year, bringing the share down to 13% by 2029.
By contrast, it aims to expand overseas equities and alternative investments in pursuit of higher long-term returns as its AUM continues to rise.
Still, analysts expect the fund to avoid aggressive selling to limit any shock to the domestic stock market.
The recent record-setting rally in South Korean shares has prompted some calls to reconsider that reduction plan.
Market observers warn the NPS’s limited room for further domestic stock purchases may act as a brake on the local stock market’s momentum.
“If the NPS continues reducing its domestic equity allocation next year, it will be virtually impossible for the Kospi to reach 5,000,” said a person familiar with the fund’s operations.
However, there are still cautious voices warning against revising the asset allocation plan based on the Kospi rally.
They argue that year-end fair value assessments, exchange rates and interest rates may lead to a natural rebalancing of its holdings.
