By Park Hyong-ki
Staff Reporter
Seoul stocks are expected to lose some luster next year in line with receding global appetite for stocks amid the U.S. subprime meltdown. It's time for investors to diversify their portfolios, says Lee Won-il, CEO of Allianz Global Investors Korea.
``I believe the risk tolerance, which has been very high especially among retail investors, will subside, slowing down investments in stocks,'' said Lee in an interview with The Korea Times.
The Seoul market is turning more volatile than it was in 2004 when the country was struggling to overcome the credit card bubble. The bond market has also been unstable, with banks rushing to issue more bonds to make up for fund shortage. The volatility of the bond market is also adding further strain to the stock market.
``Growing risks are undermining the stability of the equity market,'' said Lee.
Equity funds, which attracted more than 100 trillion won, are unlikely to grow as fast as this year, he said. Foreign investors' selling, as a means to reallocate their investments to safer products, is also expected to affect the market.
Foreign investments account for 32.5 percent of market capitalization, down from 44.1 percent in 2004, according to the Korea Exchange (KRX).
The chief executive said their investment holdings are still relatively high compared with OECD's average of 25 to 30 percent.
``It's very natural what foreign investors are doing because now the valuation of Seoul stocks has reached that of emerging markets. And the growth potential of China and India's stock markets is seen as stronger than that of Korean stocks,'' Lee said.
Global investors will keep on eyeing those markets, especially China, adding that despite bubble concerns, it is likely to lead the Asian economy in the long-term.
With growing risks and volatility, Lee advised investors to diversify individual investment portfolios more toward overseas, and to lower expectations on returns.
Korean investors have a tendency to invest too much in one thing at home, and not abroad, Lee added. The country's global investment diversification lags far behind that of other OECD members, including Taiwan and Hong Kong.
He recommends safer assets such as infrastructure funds, balanced funds and overseas funds investing in Europe, while lessening investments in China equity funds in 2008.
``By theory, stocks are bound to grow in the long-run, and it would be wise to invest in stocks little by little going forward,'' said Lee.
Lee said mergers and acquisitions among securities firms will not take place any time soon as hoped for by financial regulators and the government in line with the Capital Market Consolidation Act. ``M&As should proceed in accordance with market mechanism rather than be propelled by regulators,'' he said.
The government's move to develop global investment banks through consolidations is reasonable, but it boosted the value of securities companies, making them too expensive for M&As.
Lee said that costs for acquisitions of securities companies should go down to some extent for the ignition of deals in the industry.
Korean companies are sitting on a record amount of cash reserves, while their profitability as measured by return on equity (ROE) is weakening against slowing economic growth.
Against this backdrop, Lee said the future of Korea's capital market depends on how companies utilize their cash. Growing cash reserves and falling ROE indicate that there are less business opportunities in the market as competition is high with all sorts of businesses ranging from construction to the Internet already being established.
``There is only one option then, and that is M&A,'' he said.
It is time for corporations to expand their businesses through M&As with their big piles of cash to boost their ROE and share prices, he concluded.