By Ross Gregory
Korea Head of the Equity Markets Group, Macquarie Securities Korea
Korea enjoyed astonishing economic growth and development over the past decades.
Rapid development in the labor-intensive manufacturing, textile, construction and heavy industries from the 70s through to the 90s was followed by rising supremacy in the semiconductor and high technology sectors, and more recently Korea's service industries have started to dazzle.
Macro growth, though temporarily subdued by the Asian financial crisis which struck with a jolt in 1997, regenerated as corporate governance structures were forcibly overhauled and, responding to hard lessons learned from the excessively generous lending practices of inexperienced credit card companies, improved risk management practices were induced.
These reforms stimulated competitiveness in higher-end industries and the Korean economy now has stronger fundamentals, displaying robust quality sustainable growth.
A timely expansion in the scope and depth of Korea's financial markets has also occurred.
With relatively high reliance by OECD standards on fixed interest investments, Korean individual investors had flocked to real estate for higher yielding leveraged returns in a prolonged low interest rate environment.
Property is a scarce resource in popular locations and prone to speculative bubbles, which the Korean Government has sensibly resolved to remedy through capital gains super taxes imposed for multiple investment properties. This has spurred an increase in local ownership of Korean equities and better access to a broader range of financial products including funds and derivatives. This note briefly touches on a real Korean success story, namely the local equity derivatives market.
Korea's foray into equity derivatives started with exchange traded KOSPI200 Index futures and options contracts listed in 1996 and 1997 respectively.
These markets now rank number five and number one in the world by volume and size, a proud achievement considering that derivative products have been traded in other advanced countries for over 20 years. At the end of 2006, the cumulative trading values for these KOSPI200 derivative instruments were approximately 4,700 trillion won and 170 trillion won respectively.
More recently, new equity linked products have been introduced, deepening Korea's financial derivatives market and providing investors with new pathways to invest indirectly in the Korea bourse.
First, the unlisted equity linked securities (ELS) market opened in 2003. ELS products quickly gained popularity with investors and since inception the ELS market has observed an eight-fold increase in annual issuance size, amounting to 25 trillion won at the end of 2006. The majority of products are sold to local securities company investors.
Some products are sold through banks in the form of equity linked funds (ELF), however bank customers tend to be more conservative and often prefer lower headline yield and capital protected products sold in the form of equity linked deposits (ELD) _ a successful market in its own right.