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Global Investors Cut Korean Stock Holdings, Add Bonds in July

Overseas funds pulled money from South Korean stocks for a fourth month in July and boosted holdings of local-currency bonds as Europe’s debt crisis damped demand for riskier assets.

International investors, led by funds in the U.K., Cayman Islands and France, reduced ownership of equities by 710 billion won ($628 million), the Financial Supervisory Service said in an e-mailed statement today. Foreigners increased holdings of fixed-income securities by 1.4 trillion won to a record 89.7 trillion won, after cutting ownership in June, the FSS said in the statement.

European Central Bank President Mario Draghi pledged on July 26 to do whatever it takes to preserve the euro, while the International Monetary Fund said four days later that an orderly adjustment process to resolve Europe’s crisis is likely to be prolonged and costly. The yield on South Korea’s three-year government bonds declined 45 basis points last month to 2.85 percent, the biggest drop for a benchmark note of that maturity since December 2008.

“We saw investors’ extreme preference for safer assets last month,” Lee Jin Woo, a fund manager at Seoul-based KTB Asset Management Co., which oversees $5.8 billion in assets, said in an interview yesterday. “Since Draghi’s comments, risk appetite appears to be coming back a bit.”

Risk Averse

Foreign holdings of South Korean equities amounted to 379.9 trillion won at the end of July, accounting for 31.6 percent of shares listed on the Korea Exchange. The Kospi index of shares touched a nine-month low on July 25.

The won advanced 1.3 percent to 1,130.55 per dollar in July, following a 3.1 percent gain in June, according to data compiled by Bloomberg.

Investors from Norway were the biggest buyers of Korean debt in July, raising holdings by 1.5 trillion won, according to today’s statement. Funds from China and France followed, increasing ownership by 447 billion won and 195 billion won, respectively. The biggest sellers were from the U.S., Australia and Malaysia.

U.S. benchmark 10-year bond yields were 1.5 percent on Aug. 1, compared with 3.14 percent for similar-maturity South Korean notes. Investors including global central banks were attracted by the relatively high yields on offer, the financial regulator said in its statement.

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