South Korea's $1 trillion pension fund suspends rebalancing, Barclays warns of increased stock and currency volatility.

Barclays Bank stated that the decision by the National Pension Service (NPS) of Korea to suspend portfolio rebalancing has exacerbated volatility in the Korean stock market and put more pressure on the Korean won. Barclays Bank economist Bum Ki Son said, "Although the suspension of rebalancing has allowed NPS and the Korea Composite Stock Price Index (KOSPI) to achieve higher returns, the cost is a significant increase in market volatility. Pension funds have always been seen as stabilizers in financial markets, but this adjustment to NPS operations has instead amplified market volatility." Korean stock market volatility exacerbated by pension fund's suspension of rebalancing NPS is Korea's largest pension fund and the largest shareholder in the Korean stock market. In January of this year, the institution temporarily waived a rule that required portfolio rebalancing when asset allocation deviated from the preset range. The NPS management committee warned that in a highly volatile market environment, continuous adjustments to positions especially when Korean stock holdings exceed the target range - would have a significant impact on the domestic stock market and foreign exchange market. Driven by the excitement in artificial intelligence markets and a surge in demand for storage chips, the Korean stock market soared, but margin hikes and developments in the Iran war situation caused intense market volatility. After the benchmark KOSPI index soared by 24% in January, achieving a record single-month gain, investors paid the highest premium ever to hedge market volatility; a record that was later broken with a 31% gain in April. Korean stocks fluctuate between sharp rises and sharp falls As the KOSPI index continues its upward trend, leading major global indices, NPS raised the domestic stock allocation target by the end of 2026 from the 14.9% announced in January to 20.8%, and lowered the overseas stock allocation target from 37.2% to 34.7%. Official data shows that the fund's domestic stock investment return rate reached 21.7% in the first quarter; as of March 31, its total assets under management reached 152.61 trillion Korean won (approximately $1 trillion). Son said, "We conducted scenario analysis and found that if NPS had continued with rebalancing operations, their return rate by the end of May would have been only 11.1%." Son pointed out that although the returns were impressive, not rebalancing the portfolio would lead to much higher volatility. He also added that the suspension of rebalancing has increased the volatility of the Kospi, "because NPS did not sell during the overheated market in March, and did not buy during the market decline since June." In response to Barclays' analysis, the Korean Ministry of Health and Welfare, which oversees NPS, stated, "The fund management committee's previous decision was to enhance the fund's profitability and stability, while also considering efforts to strengthen the fundamentals of the Korean capital market, including revisions to the Commercial Code." The department also stated, "Barclays Bank's report largely relies on excessive assumptions and unverified causal analysis." Although the KOSPI index has shown some retracement this month, it has still risen by approximately 93% year-to-date, drawing increased attention to the problem of volatile market swings. Earlier this week, the Korean stock market oscillated between sharp rises and sharp falls, with the KOSPI 200 index volatility indicator reaching a historical high. Foreign funds exiting rapidly, putting immense pressure on the Korean won Son stated that while the NPS cited foreign exchange pressure as one of the reasons for the suspension of rebalancing, this decision has actually brought "huge pressure" to the foreign exchange market. He explained, "The suspension of rebalancing by NPS has actually transferred the repositioning pressure to foreign investors. Foreign funds are withdrawing from the Korean stock market, leading to significant demand for dollars, exacerbating market volatility." Global funds have net sold $78.7 billion worth of Korean stocks since the beginning of the year. Analysts believe that the significant rise in leading stocks such as Samsung Electronics and SK Hynix has led to foreign holdings hitting regulatory limits, with passive reduction in positions being the main reason for capital outflows. Korean won hits lowest point since 2009 Earlier this month, despite the South Korean government pledging to curb excessive volatility, the Korean won fell to its lowest level since 2009, highlighting the pressure faced by some Asian currencies due to the Iran war and its resulting energy impact. This week, South Korean authorities announced plans to crack down on speculative foreign exchange trading, which helped drive a strong rebound in the Korean won. Son concluded by saying, "Portfolio rebalancing operations will resume in July, and whether NPS can strictly follow the rules in reallocating assets will be a key factor influencing the movement of the Korean won. The institution has signaled that due to reducing the daily rebalancing limit, the degree of rebalancing will weaken. This could exacerbate market volatility in Korea and put more pressure on the Korean won."