Decoupling from Europe, US markets is crucial for further rise

By Cho Jin-seo

A series of good news has made investors keep their faith in the Korean stock market last week despite the escalating fears over governments’ fiscal healthiness in Europe and the United States.

Improving corporate performance at major firms such as Samsung Electronics can further boost the KOSPI index in the third quarter of the year. But analysts see that the key for KOSPI’s long-term upward swing is whether it can detach itself from the sluggish U.S. and European economies.



The decoupling from developed markets will mean that the so-called “Korea discount” — Korean stocks are valued less compared to Western firms in same sectors — should disappear, too. One evidence of that happening is that the exclusion of Korea in the MSCI Developed Market Index, which is one of the most widely used categorization for advanced and safe stock markets, is no longer received as bad news, said Kim Chul-jung, an analyst at Korea Investment & Securities.

“The market is wise,” he said in a report published last week, referring to the recent movements in the Korean and other markets in the West. “The market knows that growth does not depend on the advanced economies such as the U.S., but on China and domestic demands.”



In some sectors, shares of Korean firms are already priced higher than firms in advanced markets. The 12-month forward price-earnings ratio — a popular measure of comparing a firm’s stock price and its ability to make profits — of utility and medical sectors in Korea are 8.7 percent and 55.8 percent higher, respectively, than the same sectors in developed markets on the average, he said. In other sectors there still are discounts of around 10 to 20 percent, but the gap is decreasing.

Another evidence of decoupling from the European crisis and the slowdown in the U.S. economy is the exchange rate of the currency. Until recently, the won has been known to be a perpetually weakening currency with the won-dollar rate rising two-fold in the past 25 years. But this year, the won has broken off from the long-term trend. It has risen by 8 percent this year against the dollar, which is the largest jump among major Asian currencies. Korea’s bank interest rate has been kept relatively low so the main reason of the strengthening currency is increasing investment in its stocks and bonds.

Analysts are understandably bullish. According to a survey by FNguide, a research firm, most brokerage houses believe that the KOSPI will move between 2,100 and 2,400 in the second half of the year, meaning investors can expect returns of as much as 15 percent within six months even before taking the effect of the strengthening won into account. Hana Daetoo Securities was most aggresive to predict that the upper limit will be 2,720, meaning one can have a 30 percent return in the KOSPI market.