Liquidity feeds into stock bubble

By Yoon Ja-young

Stock markets here are expected to extend a liquidity-driven rally for a while, but some analysts caution that recent steep gains are backed by no improvement in the real economy.

With the benchmark KOSPI and the tech-loaded KOSDAQ continuing their bull run, retail investors are increasingly returning to the market.

The KOSPI closed up 3.60 points, or 0.17 percent, at 2,143.50 Friday, while the KOSDAQ closed up 8.59 points, or 1.23 percent, at an 87-month high of 706.90.

The KOSPI is forecast to beat its record high of 2,228 points set in May 2011.

Foreign investment banks are now forecasting between 2,200 and 2,300 points. Morgan Stanley expects the main index could reach as high as 2,700 this year if corporate earnings rise 21 percent.

John Kim, an analyst at IBK Investment and Securities, said that foreign funds had been flowing into the Seoul bourse after Europe’s own version of quantitative easing.

Foreigners bought nearly 3 trillion won in shares in March. “The quantitative easing by the European Central Bank will continue until September 2016. With more analysts expecting the U.S. key rate hike to be delayed until September due to sluggish March job figures, the global liquidity expansion will continue and so will its inflow into the Seoul bourse,” he said.

The Bank of Korea’s rate cut is helping as well, he said.

“The Seoul bourse is now in typical liquidity-driven mode, with funds flowing in after failing to find an alternative investment amid low interest rates.”

The historically low key rate of 1.75 percent is prompting small investors to return to the bourse, with daily transactions by individuals surpassing 3 trillion won for the first time in three years. The ratio of individual investors in the stock market has reached 60 percent.

You Seung-min, chief strategist at Samsung Securities, however, warned of a bull run on top of many uncertainties.

“Corporate competitiveness hasn’t improved and sales are sluggish. It isn’t reasonable to expect substantially better profitability,” he said.

Lee Young-won, a chief strategist at HMC Securities, pointed out that the discrepancy between the economy and the stock market is expanding.

“The 2014 growth figure was low, but economic growth in 2015 is expected to be even lower,” he said. “The recently changed outlook by the Bank of Korea shows it would be difficult for the economy to find a breakthrough.

“Moreover, external conditions, which determine exports, aren’t favorable, either. As China is slowing down sharply in terms of both exports and imports, it will be difficult for Korean exporters to find a breakthrough.”

You said foreigners might slow down buying in Korea if they complete redistributing funds among emerging markets.

“I am maintaining a positive outlook for the stock market for the latter half of the year, but I am still cautious about taking the recent rally as a shift to a full-fledged bull market,” he said, citing concern over a Greek exit from the eurozone and tapering by the United States as risks for the second quarter.

Eugene Investment and Securities equity strategist Park Seok-hyun said the strength of the Unites States’ economic recovery in the second quarter will be a guideline to the direction of the bourse.

“The U.S. Fed still matters,” he said. “While decreasing expectations of a key rate hike for June led to the extension of the global liquidity momentum, changes in the U.S. Fed policy will start exerting influence again. Don’t forget that it can lead to changes in global liquidity momentum.”