An era of uncertainty

KOSPI undergoes corrections on course toward another upturn

By Kim Jae-kyoung

Osama bin Laden is gone but his sudden death has led to even more uncertainty in an already uncertain economic climate, sending the local financial market on a roller coaster ride.

The domestic equity market started in May with a bullish run after the death of bin Laden, who masterminded the Sept. 11 attacks against the U.S. in 2001. The KOSPI hit a record high of 2,228.96 on May 2 but the rallies turned out to be short-lived. The benchmark index has since suffered huge losses on the back of a foreign investors’ selling spree.

Despite the Bank of Korea’s (BOK) decision to freeze the key rate Friday, the stock market lost further ground. The KOSPI closed at 2,120.08, down 0.12 percent from Thursday following losses of 43.98 points that day. The currency market has also remained highly volatile with the won losing nearly 20 won against the U.S. dollar only in May.

What is of more concern is that prices of commodities, including oil, gold and silver, recently took a nosedive, dampening global investors’ appetite toward risky assets in emerging markets and thus adding to market volatility here.

Now one question is on the lips of every player in the market. Is the heyday of the stock market over or is the recent fall only a passing hiccup that lies in the path to another bullish run? The answer is complicated with market analysts split into two different camps although there is a consensus that volatility is expected to stick around for a while.

Corrections underway

With the collapse of oil prices following the death of bin Laden, there are signs that global investors are scaling back their investments in emerging markets as their appetite for risk wanes amid lingering uncertainties.

What’s behind the move is the bearish outlook for the global economy and financial market caused by renewed fears over a debt crisis in Europe, inflation anxiety and a slowdown in global liquidity following the end of QE2 slated to expire in June.

In addition, the recent appreciation of the Korean won against the greenback is undermining the competitive edge of local exporters, adding to market volatility.

“I’m afraid that the outlook is not encouraging. With inflation expected to increase on the back of medium term trends in commodity prices, wages are also seeing widespread hikes. With Bank of Korea (BOK) still allowing relatively slack monetary conditions this could lead a wage-price spiral to form,” Slilipo Luca, chief economist for Asia-Pacific at Natixis, told Business Focus.

“This would then lead to acceleration in the degree of tightening by the central bank as alternative monetary tightening measure ― appreciation of the exchange rate ― is not efficient and losing steam. This will induce a significant stock market correction which is going to dominate the remainder of the year,” he added. “Foreign holders of equities will continue to retreat from emerging markets in Asia and elsewhere due to expectations of corrections.”

However, many analysts see what’s happening as a temporary correction on course toward another bullish market. They expect that the corrections will be short-lived, citing strong economic fundamentals.

“The key culprit behind the market volatility is worries over a slowdown in G2 economies _ the U.S. and China. Key macro economic data in the U.S. and China fell due to high oil prices caused by the Middle East turmoil and the Japan’s earthquake-led production setback,” Oh Sung-jin, head of research at Hyundai Securities, said.

“These two unfavorable factors have shown signs of improvement. Oil prices seem to have turned downward, while Japan’s manufacturing production has got back on track,” he added. “Investors shouldn’t be surprised by the corrections. Instead they should pay attention to earnings results of major companies.” He expects the benchmark KOSPI to reach 2,300 in the second quarters and 2,400 by the end of this year.

Auto, IT shares are promising

Over the past few months, shares from three industries ― auto, chemical and energy ― led market rallies. However, with the collapse of oil prices, there is heated debate over the future course of these shares.

Energy and other commodities shares have been rising sharply due to benefits from oil price hikes and global economic recovery but they are now leading the key index decline, mirroring falls by their peer companies in the U.S.

Automakers finished lower on foreign selling Friday. Top carmaker Hyundai Motor dropped 2.75 percent to 229,500 won and its smaller affiliate Kia Motors was down 3.22 percent to 72,100 won.

Chipmakers, however, gained ground as prices of computer memory chips climbed upward, signaling an industry rebound. Top memory chipmaker Samsung Electronics added 3.5 percent to close at 916,000 won and Hynix Semiconductor advanced 2.22 percent to 34,500 won.

Analysts forecast that auto shares will continue on a bullish run after a short correction, while energy and chemical shares will struggle for a while due to a fall in oil prices.

“In the second quarter, shares of auto, IT, semiconductor and construction are likely to lead the market upturn, while energy shares will be left out of the leaders’ group,” Oh of Hyundai Securities said.

“Automakers, including Hyundai Motor Company, are expected to enjoy handsome profits in the second quarter by capitalization on sluggish production of their Japanese counterparts. Also, construction firms with high overseas presence, such as Samsung and Hyundai, are considered promising,” he added.

Still, many analysts suggest a cautious approach, citing ambiguity surrounding Asia’s fourth largest economy. “The volatility in equity markets is so great, that it is hard to predict which stocks will do well. My advice is to chase large cap with healthy profits,” said Mauro F. Guillen, a professor at Wharton School of Business.

Luca of Natixis also said, “Corrections might be widespread but of course sectors which improved faster recently are those at risk of stronger corrections. Counter-cyclical stocks might over-perform in a context of deceleration of growth in Asia and elsewhere.”

Don’t panic but be cautious

It is widely believed that May will be the “reflection point” of the local equity market as QE2, the $600 billion second stage of the Fed’s bond-purchasing program, is scheduled to end in June and the fate of dollar remains anchored to QE2 expiry.

At a press conference in late April, Fed Chairman Ben Bernanke said that QE2 will continue through June, which many believe will strengthen the value of the U.S. dollar.

“When you make an investment decision in the coming quarters, two key variables ― the value of dollar and commodity prices ― should be factored in. How fast the local market will bounce back will depend on the volatility of those variables,” a BOK economist said, asking not to be named.

“It can be wise to pause for a moment and wait for market stabilization. However, you have to remember that every downturn comes with an opportunity. To snap up an opportunity, you need to see and invest long-term, not swayed by short-term volatility,” he added.