At the time of the stock market surge, South Korea's pension fund significantly increased its target for local stock allocation! Passive selling restrictions are expected to support the mid- to long-term bull market.

South Korea's large-scale pension fund has significantly increased its domestic stock allocation target, a move that may help it avoid being forced to sell stocks due to exceeding the holding limit as a result of the recent surge in the South Korean stock market. In a statement released on Thursday by the National Pension Service (NPS) of Korea, the fund raised its domestic stock allocation target from the 14.9% announced in January to 20.8% by the end of 2026. As of February 2026, the fund's assets under management were approximately 161.04 trillion Korean won (approximately $1.07 trillion). At the same time, one of the world's largest pension funds also reduced its overseas stock allocation target from 37.2% to 34.7%. One key issue of concern for investors is whether the fund will adjust its domestic stock allocation target after the unprecedented surge in the Kospi index pushed its holdings far above the current target. This adjustment reflects both the exceptional rise in the South Korean stock market and policymakers' concerns about avoiding large-scale rebalancing that could impact the index. The committee stated that this decision was made after reviewing market conditions since January, the fund's profitability and stability principles, the impact on financial markets, and feedback from experts. The committee stated that this adjustment aims to readjust the target weights of various assets for 2026 and set the direction for future asset allocation. Since the beginning of the year, the Kospi index has risen by over 94%. According to data from the National Pension Service of Korea's official website, as of February, domestic stocks accounted for approximately 24.5% of the fund's investment portfolio. With the Kospi index rising by about 31% since the end of February, the proportion of domestic stocks in the fund's investment portfolio may increase further. The committee stated that raising the domestic stock allocation target reflects potential structural changes in the market and the reality of the fund's increased holdings of domestic stocks. The adjustment is aimed at improving the fund's long-term profitability and stability, while reducing the impact of portfolio rebalancing on the market. Increasing the proportion of domestic stocks may reduce the need for the National Pension Service of Korea to sell stocks to rebalance the portfolio during market upswings, thus helping to reduce the risk of pressure on the market due to upward momentum. The National Pension Service of Korea stated that the revised domestic asset allocation target will take effect from the end of June. As the adjustment leads to a decrease in the proportion of overseas stock allocation, it may also have additional effects, such as easing the demand for US dollars and alleviating pressure on the South Korean won. Since the outbreak of the Middle East conflict at the end of February, the South Korean won has come under pressure again. The January adjustment - where the domestic stock allocation proportion was raised from 14.4% to 14.9% and the overseas stock allocation target was lowered from 38.9% to 37.2% - was seen as reflecting the Kospi's upward trend while also aligning with efforts by the South Korean authorities to restrain the demand for US dollars in the context of a surge in local investors' overseas investments. The National Pension Service of Korea extended its foreign exchange swap arrangement with the Bank of Korea in December last year to help stabilize the exchange rate of the South Korean won. Further reducing the overseas stock allocation target and increasing the proportion of domestic stocks may also be seen as providing support for the Korean won - the South Korean won briefly fell below 1500 won to the US dollar. The booming development of artificial intelligence globally has greatly driven the demand for storage chips produced by SK Hynix and Samsung Electronics, leading the South Korean stock market to perform globally leading this year. However, at the same time, foreign capital is withdrawing at a record pace. According to data disclosed by The Kobeissi Letter, foreign investors have sold a net amount of approximately $22 billion in Korean stocks from May to date, and if this pace continues until the end of the month, it will set a historical record for the largest outflow of foreign capital in a single month. From the beginning of the year to now, foreign investors have collectively sold approximately $60 billion in KOSPI constituent stocks, also likely to set a new record for the largest net selling this year. The selling is highly concentrated in the semiconductor sector. SK Hynix and Samsung Electronics are the main targets of foreign divestment, with SK Hynix facing about $20 billion in divestment by foreign investors since the beginning of the year, with about $12 billion in just one month of May. Since November 2025, the cumulative net outflow of foreign capital in SK Hynix has reached about $26.7 billion. This outflow of funds is particularly notable because foreign investors play a significant role in the South Korean market - their holdings account for about 39% of the total market value of the KOSPI index. Analysts point out that such a large-scale ongoing divestment indicates that foreign investors are systematically reducing their exposure to Korean equity assets, rather than just making structural realignments. It is worth noting that the selling occurred against the backdrop of a strong overall performance of the South Korean stock market, reflecting a divergence pattern of "rising while withdrawing" that mirrors the deep-seated cautious sentiment of foreign investors towards the South Korean market outlook. As foreign capital continues to flow out of the South Korean stock market, the National Pension Service of Korea's adjustment of the domestic and overseas stock allocation targets is expected to provide support for the medium to long-term bull market and also help maintain the stability of the South Korean won exchange rate.