The Korean stock market is rallying. There were some ups and downs in January, but an upward trend had been maintained, climbing 130 points in one month. The market has stabilized now at just under the 2000-point mark and experts are wondering whether the market can sustain the steady swell. Today, we have invited Mr. Kim Seong-bong, a researcher at Samsung Securities to talk about the prospect for the Korean stock market. First, he tells us about the factors driving up the stock numbers.
Concerns over the maturation of Italian government bonds in February were expected to stall Korea’s stock market in January. Contrary to the gloomy outlooks, the Korean stock market fared quite well that month because the interest rates of the Italian and Spanish bonds had stabilized. This lowered the risks for other stock markets around the world and boosted valuation. Also, foreign investors have made more than seven trillion won worth of net purchases in the Korean bourse since the implementation of the European Central Bank’s long term refinancing operation on December 21st. The stock index also rose as the undervalued stocks of struggling securities firms, construction companies, marine companies and shipbuilders were snatched up.
Initially, the Korean stock market started the New Year amid grave concerns, but it ended up closing at 1,826 points, which was 0.63 points higher than the 2011 closing, thanks to the stronger local economic indicators. Except for a few adjustments, the Korean stock market sustained an incline, nearing the 2,000-point target, which had been out of reach since last August. The biggest engine driving the stock price hike is the influx of foreign capital. Korea’s Financial Supervisory Service reported that foreign investors have purchased local shares worth more than 6.2 trillion won, or over 5.5 billion dollars, in the month of January. Judging from past experiences, such a huge acquisition is followed by a booming stock market in the following month.
There were about ten instances when foreign investors made net purchases worth more than two trillion won, or about 1.8 billion U.S. dollars. KOSPI rose nine out of those ten times, at an average of 2.8%, and fell only once. Nevertheless, some say the projection is statistically insignificant, because there were only ten sample cases. Despite this statistical shortcoming, the return of foreign investors to the Korean stock market since their exodus last fall is very encouraging for Korea and gives a much needed momentum to the Korean stock market. KOSPI is expected to steadily rise as the European fiscal troubles head toward resolution and foreign capital keeps coming into the country.
Foreign money is flooding into the local stock market as overseas investors make investments in Korea and external economic conditions improve. Better stock market conditions have emboldened experts to project that KOSPI would break the 2,000-point mark again in February. Traditionally, the month of February has been unpredictable for stock markets around the world, sometimes reeling from the fallouts of unstable January. Can the Korean stock market break the pattern and see a steady growth?
Judging from the current conditions, the 2,000-point mark can be passed easily and experts say it can go as high as 2,050 points soon. But we must note that breaking the 2,000-point is not as important as sustaining that upsurge beyond that point. The movements of global money indicate that Korea will be able to maintain the rallying trend. However, we need to watch whether the Italian government bonds with February maturation dates would roll over, whether the Greek government will work diligently with private creditors to avoid default, and whether any additional fiscal risks exist for Portugal. With these factors still lingering to derail the Korean stock market, I believe KOSPI would rise, but not greatly, just up to a certain point and no more.
It appears that KOSPI would exceed the 2,000-point sometime this month, but the important caveat would be to maintain the surge. Korea’s 23-month-long trade surplus turned to record a deficit of nearly 2 billion dollars last month, putting a brake on the Korean export machine. Also, Korea faces a massive maturation of government bonds from troubled European countries, about 85 billion euro in February, 87 billion euro in March, and about 77 billion euro in April. This could negatively affect the Korean stock market this month. It is encouraging, therefore, that European economies agreed at the EU Summit held last Monday to launch the permanent rescue strategy of the European Stability Mechanism earlier than planned. Italy succeeded in issuing long-term Treasury Bills at an interest rate of 6%, easing concerns for credit default and fiscal instability in the region. However, global finance can always be upset by various domestic and foreign factors, and the Korean stock market has always been vulnerable to changes in international conditions. What factors pose threats for the stability of the Korean stock market?
Since the governments around the world are taking various measures to circulate money and boost the economy, the stock market is likely to continue its steady climb, even if the economy slips a little or corporations underperform. In terms of liquid assets, most of the investors who took off from the Korean stock market in 2008 were American, but they have returned in force to buy up Korean shares, making up the largest buyer group in the Korean stock market from 2009 to 2011. If that trend holds true for Korea’s European investors, they may come back to the Korean bourse after June when European financial institutions must replenish their capitals. European investors will probably want to dump their low-return assets or government bonds with very low interest rates and look for places like Korea to invest their new assets for higher returns. Those profit-seeking investors are likely to return to Korea and boost the Korean stock market. I think European investors will be the most significant factor for KOSPI.
The Korean stock market will respond acutely to global variables, because of the country’s dependence on export, abundant liquidity, and highly lucrative foreign exchange market. However, Korea is full of undervalued yet solid businesses. The Korean stock market is likely to soar again if global investors recover from the recession and look for new business opportunities.