Stock gains likely to be capped by weak fundamentals

By Yoon Ja-young

Seoul stocks are expected to maintain their modest gains for a while on ample market liquidity, analysts said Thursday.

However, they remain skeptical about the sustainability of the advances due to weak economic fundamentals and a lackluster corporate earnings outlook.

During the past three years, the country’s main KOSPI index has been rising and falling at somewhere between 1,850 and 2,050 points like a ball trapped inside a box.

As the index surpassed 2,060 for the first time in seven months this week, with the market cap reaching the highest ever, investors are wondering whether the Seoul bourse will now make a leap forward, to soar above the range.

The main bourse opened firmer on Thursday, but lost ground after the Bank of Korea revised down its forecast for 2015 economic growth to 3.1 percent from 3.4 percent.

The KOSPI closed at 2,058.87, Thursday, down 0.39 points from the previous day.

Suh Dong-pil, an analyst at IBK Investment and Securities, said the index is likely to move upward for a while on increasing liquidity.

“The quantitative easing by the European Central Bank and the expectation that the U.S. Fed will delay a key rate hike worked positively for global liquidity. The trend is likely to continue,” he said.

The market had expected the key rate hike in the United States to come anytime with the U.S. Fed dropping its “patience pledge” on interest rates, but recent indices indicate that it may take more time than expected.

Suh pointed out that the U.S. housing market has entered a sluggish phase. “The United States’ first quarter GDP is likely to turn out sluggish. In that case, the key rate hike may be delayed,” he said, citing it as a positive factor for the stock market.

“The Chinese economic indices aren’t good either. They will add pressure for a key rate cut. The sluggish indices will ironically work as a positive for the stock market.”

However, Suh said it will not be easy for the KOSPI to rise above a certain level due to sluggish exports, which are not so strong a sustaining pillar for the economy anymore.

“It is known that the import decrease is behind the country’s trade account surplus. It is also worrisome that the total export is decreasing,” he said, adding that the external conditions are evidently unfavorable for export.

Lee Young-won, chief strategist at HMC Investment and Securities, also said that foreign investors will continue buying shares on the liquidity inflow.

“Despite the sluggish macroeconomic indices, the expectation on the first quarter corporate performances is relatively positive,” he said.

However, he added that the fundamentals are not favorable to expect a continuous rise in stocks.

“The economic growth rate continued falling until the fourth quarter last year, and the pessimistic outlook is increasing for 2015. With both the domestic market and exports contracting, recoveries in the real estate and the private consumption as well as the policies in China, which is Korea’s biggest export market, will determine whether the macro-economy will recover or not. The market will be examining whether such positive changes are probable for the time being.”

Shinhan Investment said in a report that KOSPI will be negatively affected by the U.S. key rate hike between the middle of the second quarter and the third quarter.

“The super dollar will deal a blow not only to Korea but also to the emerging economies,” it noted.