"Forced Selling Begins in July"... NPS 'W1 Trillion Bomb Sale' Looms Over KOSPI

[Financial News] The public pension fund, including the National Pension Service (NPS), is unloading large volumes of shares in the domestic stock market. The prevailing view is that it has taken preemptive steps to adjust portfolio weights ahead of the end of the grace period for domestic stock rebalancing, which is scheduled for the end of this month.
According to data from the Korea Exchange (KRX) and other sources on the 22nd, the public pension fund has recently shown strong selling pressure in the main board market. In particular, it posted net sales of W1.225 trillion over four straight days since midmonth, while daily selling volume has also expanded steadily from around W7 billion at the start to W589 billion later on.
Weekly cumulative net selling also jumped more than sixfold from the first week of June to the third week, with more than W2 trillion sold this month alone. Market participants increasingly see this as a structural reduction in exposure rather than simple short-term profit taking.
The investment industry points to the timing of NPS asset allocation rules as the main reason behind the selling spree. Under a decision made by the National Pension Fund Operation Committee in January, NPS had been allowed to delay mechanical selling even if its holdings moved outside the permitted range, but that measure expires at the end of this month.
From next month, the normal asset allocation rules will be strictly reapplied. As a result, the fund is believed to be trimming holdings in advance to spread out any selling shock that could follow the end of the grace period.
Earlier, the committee raised the target weight for domestic stocks and widened the tactical asset allocation band to ease downward pressure on the stock market from large-scale selling, lifting the effective upper limit to as high as 28.8%. However, as the KOSPI has risen sharply recently, the market estimates that the value of NPS stock holdings has also surged, pushing the current domestic stock ratio close to 30%, above the effective ceiling.
If the stock market holds at current levels or rises further, mechanical selling by the public pension fund will be unavoidable in order to comply with long-term asset allocation principles.
Still, market experts say the chance of a sharp, short-term market drop caused by a sudden flood of large-scale selling from the public pension fund is limited. That is because the committee has made the management approach more flexible so it can reduce the daily rebalancing cap and spread sales over a longer period to soften market impact.
Even so, the fundamental need to gradually reduce the domestic stock ratio above the permitted ceiling remains unchanged.
In the end, the public pension fund's continued selling is expected to remain a major drag on market momentum for the time being, as it is one of the key sources of demand in the domestic stock market.

moon@fnnews.com Moon Young-jin Reporter