"Won turns into toilet paper"! Concerns over the $350 billion investment agreement between the U.S. and South Korea, South Korean citizens are buying U.S. stocks and gold in droves

A $350 billion investment commitment to the U.S. is triggering an escalating capital outflow in South Korea.

As South Korean President Lee Jae-myung is set to meet Trump during the APEC summit this week, the market's focus has shifted from the comfort of the trade agreement framework reached by the two countries months ago to the heavy price South Korea is paying for it and its negative impact on investor sentiment.

Amid concerns that the South Korea-U.S. agreement will erode the value of South Korean assets, retail investors are pouring into dollar-denominated stocks and gold at an unprecedented scale, pushing worries about the depreciation of the won to a peak.

In the past three months, the won has depreciated by over 3%, making it one of the worst-performing currencies in Asia. South Korean central bank governor Lee Chang-yong has publicly stated that the behavior of domestic investors rushing to buy overseas assets is "putting significant pressure on the won" and increasing the difficulty for the central bank to manage exchange rate fluctuations.

(The dollar against the won has risen over 3%)

The Panic of "Becoming a Beggar Overnight"

Goldman Sachs noted in a report on October 24 that the outflow of retail funds may be the biggest driving factor behind the won's significant underperformance relative to other Asian currencies.

32-year-old office worker Kim Ji-yeon in Seoul is transferring all available funds into U.S. stocks and gold, openly expressing her anxiety:

The won is turning into toilet paper.

This panic sentiment is rapidly spreading among South Korean retail investors. Kim Ha-joong, head of the private wealth management department at Future Asset Securities, revealed that many of his clients have turned to dollar assets. He stated:

Retail investors now have a strong intuition that if they do nothing and continue to hold won, they will become beggars overnight.

Data shows that this trend is intensifying. According to data from the Korea Securities Depository, the amount of U.S. stocks and bonds held by South Korean retail investors has reached a record $184 billion this month.

For new investors like John Lee, an employee at a tech startup in Gyeonggi Province, the pessimism marks the beginning of their investment journey. He said:

Investing in won-denominated assets now feels like investing in depreciating assets; I genuinely feel that investing in the U.S. is the only way to protect myself from inflation.

Ironically, the capital outflow from retail investors comes at a time when the South Korean stock market is experiencing an astonishing bull market.

So far this year, the Korea Composite Stock Price Index (Kospi) has surged nearly 70%, making it one of the best-performing stock indices globally, with gains far exceeding returns from investing in U.S. stock indices. For example, the stock price of SK Hynix, a supplier of chips to Nvidia, has more than doubled.

However, this bull market driven by large institutional investors and foreign capital has not convinced local retail investors.

According to Bloomberg and data from the Korea Securities Depository, despite foreign investors injecting about $13 billion into the South Korean stock market in the second half of this year, this amount has been offset, and even exceeded, by the outflow of funds from retail investors.

The Unresolved Details of the Agreement and Concerns About the South Korean Economy

At the core of market anxiety is the enormous uncertainty surrounding the U.S.-South Korea investment agreement and concerns about the outlook for the South Korean economy.

According to reports, South Korean President Lee Jae-myung admitted in a media interview last Friday that both sides are "still at an impasse" on key details of the trade agreement, such as how to invest and how to allocate profits and losses.

As a condition for limiting tariffs on South Korean goods such as automobiles, smartphones, and machinery to 15%, South Korea has committed to investing $350 billion in the United States. However, how this massive amount of money will be spent remains unresolved.

Lee Jae-myung initially stated that $150 billion of the $350 billion would be specifically allocated to help South Korean shipbuilding companies enter the U.S. market. The South Korean side hopes to significantly reduce the impact on national finances by using loan guarantees instead of cash payments.

The Bank of Korea has also warned that, without affecting the foreign exchange market, the government may only be able to provide up to $20 billion annually. Lee Jae-myung hinted that if favorable conditions cannot be reached, the two countries may not finalize the agreement before his meeting with Trump, emphasizing:

The U.S. will certainly try to maximize its interests, but this must not come to the extent of causing catastrophic consequences for South Korea.

Moreover, the economic outlook for South Korea is not as prosperous as its stock market appears.

According to government estimates, South Korea's economy is expected to grow only 0.9% this year, the slowest growth rate since the COVID-19 pandemic. Rising household debt and signs of a real estate bubble have limited the ability of South Korean banks to stimulate growth through interest rate cuts.

The Bank of Korea maintained its interest rate unchanged for the third consecutive meeting on October 23