An official looks at the monitor screen showing the benchmark Korea Composite Stock Price Index (KOSPI) at the Korea Exchange in Yeouido, Seoul, Friday. Seoul shares rose 0.81 percent on automaker and oil refiner gains, but trading was volatile amid worries over U.S. recession. / Korea Times

Seoul bourse faces bumpy road ahead on fears of US recession

By Jung Sung-ki

Following the collapse of the local stock market triggered by a U.S. credit rating downgrade, the biggest question among investors both at home and abroad is whether the Seoul bourse has bottomed out.

Investors have been split over the future course of the benchmark KOSPI. Optimists say that the domestic market will bounce back after short-term corrections on the back of robust economic fundamentals.

In contrast, pessimists counter that the market is facing an uneven recovery as the world’s 13th largest economy is vulnerable to a number of risks associated with U.S.’s recession and fiscal crisis in Europe. If the double whammy from abroad takes place at the same time, it will combine to dampen investors’ appetite for risks, causing massive capital outflow.

“A nose-dive in stock prices seen in early August appears to be over and the equity market is back on track now,” Kim Hyoung-ryoul, a strategist at Kyobo Securities, told Business Focus. “But a rebound is to be lower than in the past based on revised earnings estimates.”

Early this year, local companies reported strong earnings, with operating profits expected to exceed 100 trillion won ($92 billion) this year. KOSPI was expected to hit 2,200 mark based on the profit estimation.

“If we assume that corporate profits at KOSPI-listed firms will fall by 10 percent on average from our previous expectations, then it would make sense for KOSPI to be around 1900,” said Kim. “But there has been a large fluctuation and concerns are rising that firms in cyclically sensitive industries may suffer 15 percent fall in profit. That means there will be downward pressure whenever KOSPI tries to rise over 1850.”



Shaun Cochran, head of Korea research at CLSA Asia-Pacific Markets, said, “On balance we have probably begun a new bear market. However the market is oversold and technical rallies are quite normal. It would not surprise me if the market rallied to the 1900-200 level on the KOSPI.”

“If it does, that will be the time to assess the risk of global recession,” he added. “If we failed to rally through the 200DMA then we will probably enter and accelerated drop thereafter,” he said.

The latest downgrade in Japan’s credit grade is also expected to affect investors’ sentiment to a limited extent, according to Seo Dae-il, an analyst with Daewoo Securities, said.

Moody's Investors Service said Aug. 24 that it had lowered the credit rating of Japanese government bonds one notch ― from Aa2 to Aa3 ― for the first time since May 2002. The U.S. ratings agency cited the delay in economic recovery from the March 11 disaster and frequent administration changes, which made it difficult to implement long-term economic and fiscal management effectively, as reasons for the downgrade.

“Japan’s credit downgrade is certainly a negative issue, but it is unlikely to have a big influence on the Korean market in the long-term,” Seo Dae-il, an analyst with Daewoo Securities, said. “The downgrade by S&P in Japan’s credit grade to AA- in January even didn’t affect the Korean market.”

Risk factors

Analysts say Korea’s stock market is to be swayed by debt default risk in some economies, including the Unites States and European Union.

Nevertheless, any economic slowdown in China would have a bigger influence on South Korea because of its high level of dependence on bilateral exports.

Kim at Kyobo said there are few feasible steps to stimulate the U.S. economy at the moment, so there is a high risk of liquidity problems in the global market. Europe is also in a similar situation.

“Fortunately, Korea has reduced its dependence on the U.S. and European economies to an extent. The problem is China,” he said.

As advanced economies are facing problems, economic fundamentals and macro economics in emerging countries led by China are negatively affected, said the strategist.

South Korea is heavily dependent on trade with China, which is the largest trading partner of the country. The former’s exports to the latter accounted for 25.1 percent of its total overseas shipments in 2010 with an estimated value of more than $200 billion, according to the Korea International Trade Association.

The figure is even larger than all of the country's exports to the United States and the European Union combined with 22.2 percent that year. On the other hand, nearly 17 percent of South Korean imports come from China. Korea posted a $45.3 billion trade surplus with China last year.

Some foreign experts predict that China’s economy will maintain relatively steady, high growth due to its maneuverable economic policy.

"The effect of high US sovereign debt is likely to reduce consumer demand, so China's exports may experience rapid decline in the coming months," the China Daily quoted People's Bank of China (PBOC) advisor Xia Bin, as saying.

Foreign influence

Heavy foreign stock selling of Korea’s top 10 conglomerates shares is cited as a key reason behind the plunge in the KOSPI this month.

According to the portal site, Chaebul.com on Friday, foreign investors dumped 33.5 million shares of the country’s top 10 companies between Aug. 11-24.

The figures add up to about 35 percent of the total foreign sell-off over the same period estimated to be more than 95 million shares.

Foreigners sold a total of 9.52 million shares in Hyundai Motor Group the largest disposal in August followed by Samsung Group with 6.46 million shares.

Meanwhile, foreigners sold more than 5.2 and 3.8 million shares in Hanhwa Group and LG Group, respectively.

Analysts and regulators say that strengthening institutional investors’ influence is one way to temper foreign investors’ overlarge influence, but restrictive regulations hamper their reach.

Korean stocks have fallen faster than any comparable country.

Local stock declined Aug. 2-19 and even outpaced Taiwan by more than 3 percent, even though both countries have similar trade-based economies.

This is largely due to foreign investors ― who held 33 percent of KOSPI’s market capitalization as of July ― going on a selling spree for 14 trading days that broke only once on Aug. 16 and peaked on Aug. 10, reaching 1.28 trillion won in net selling.