Mini Rally May Come Early Next Year
By Kim Tae-gyu
Staff Reporter
As the global economy continues to worsen, professional economists and analysts are seemingly staging a gloomy competition of coming up with the most negative outlook for next year.
However, Lee Chang-hoon, a seasoned asset manager and CEO of Prudential Asset Management in Korea, is focusing on one bright spot ― a mini rally may come early 2009.
``The domestic stock market has a shot at enjoying a mini rally in a few months, or early next year as the market has seemed to hit bottom at the moment,'' Lee told The Korea Times in a recent interview.
``For example, selling sprees by both local and foreign investors have begun to subside on our stock market. Plus, the launch of the Barrack Obama Administration will provide global momentum early 2009,'' the 46-year-old said.
Lee did not articulate how much the stock indices would jump over the short-term bullish run but said share prices might soar by 40-50 percent overall from rock bottom.
This means the benchmark KOSPI may touch 1,300 in the first half of next year, one of the most optimistic projections for early 2009.
After peaking at above 2,050 last October, the KOSPI has halved over the past year to stay in the neighborhood of 1,000 throughout November and December.
In this bearish climate, domestic brokerages and economists have presented negative outlooks for next year. Shin Young Securities even projected an ``Ice Age underrating of equities'' in which the KOSPI may plummet to 510 under the worst-case scenario.
``Believing the likelihood of a mini rally in the near future, we are now expanding the proportion of shares in our investment portfolio,'' Lee said.
Bear Market Rally?
If Lee's forecasts prove correct, then the question is whether the mini rally would be a technical rebound after an abrupt stock market break or the start of a bullish trend in the long term.
In other words, the bottom line is whether or not the economy has reached the definitive floor.
Lee did not specify but he appeared to believe the mini rally would be closer to a short-term recovery for technical reasons rather than a turning point toward an entirely new trend.
The reason: The real economy will deteriorate without showing any signs of improving next year, according to Lee.
``Beginning the fourth quarter of this year, we will face worsened economic figures throughout next year as the economy falls into a downward spiral,'' Lee said.
``People will be able to feel that things get better no earlier than 2010. Recessions in the aftermath of financial crises typically last a couple of years at the minimum,'' he said.
Lee also noted a big chunk of Prudential's stock portfolio consists of defensive shares that are less vulnerable to economic downturns. Only a small portion are those that are too cheap to pass up.
This portends Lee thinks next year's mini rally, if there is one, will be a bear market rally ― rising stock prices after a vicious decline. But it doesn't last long and is usually followed by another terrific fall.
According to online encyclopedia Wikipedia, a bear market rally refers to an increase in prices during a primary bear market trend.
Bear market rallies are typical in long down markets and notable examples can be found in the United States and Japan amid the Great Depression and the Lost Decade, respectively.
After the October crash of 1929 in the U.S., the over-sold stock market recouped most of its losses in the following months. But it eventually ended up falling off a cliff in 1931 and 1932.
In the 1990s in Japan, where stocks dived almost 80 percent, the Nikkei stock average also enjoyed strong rebounds a couple of times, exemplifying bear market rallies.
However, the rally phases were destined to be short-lived both in the U.S. and Japan because the primary direction of the market was to head south.
Public Enemy No. 1: Asset Deflation
For the economy to get back on the right track, Lee said that we need to prevent the ongoing asset deflation from consuming the country because it may cause an awful chain reaction.
``Real estate prices are likely to drop further next year. The worry is that they may descend too much, thus threatening the financial soundness of banks,'' Lee said.
``Should our banks be in big trouble, it would be disastrous. If we can achieve a soft landing for property prices, however, things would be under control,'' he said.
His concern: plunging home prices will increase defaults on house mortgages, which amount to hundreds of trillions of won across the country. Then, banks will attempt to regain their financial health by de-leveraging, freezing the already cold money market.
``Accordingly, the government is required to employ every means available to prop up real estate prices. People are wary of allocative unfairness when home prices go up, though'' Lee said.
``The urgent problem is asset deflation. We need emergency steps to make the economy stay alive. We will be able to deal with fairness issues later on,'' he said.
Lee noted the government has to play a bold role to deter any serious asset deflation.
``In hard times, leadership does matter. A leadership with expertise, consistence and the ability to communicate with people is a must at the moment,'' he said.
BIS Ratio
Asked about anti-cyclical properties of the Bank for International Settlements (BIS) ratio, Lee said that a more flexible and contingent system would better serve the economy.
The BIS ratio is a barometer to measure the solvency of a bank by comparing its risk-bearing capital and risk-weighted assets. A high number represents a better status.
The BIS ratio has come under criticism of late since it is counter-cyclical ― the ratio matters in economic downturns hence it makes banks limit loans during recessions. The BIS ratio is not in question in booming times and as such fails to deter an unbridled amount of loans.
In Korea, the BIS ratio has been touted as one of the main culprits keeping banks from extending liquidity.
Earlier last month, President Lee Myung-bak urged the easing of the strict BIS requirements, which he contended make it difficult to lubricate the illiquid market.
The remarks are in line with those of Chang Ha-joon, an economics professor at Cambridge University, who made clear his objections to the current BIS system.
``I am not sure what is the right BIS ratio. It might be 10 percent, 8 percent or some lower figure. The bottom line is that the standards should change in tune with the economic situation,'' Chang told The Korea Times in a telephone interview.
Prudential Asset Management CEO Lee concurs.
``I think a new mechanism should emerge that can mirror what is going on in the market. I don't think that the BIS ratio thing can be grappled with by our country alone, though,'' Lee said.
``After going through the current financial storm, I think that a new paradigm will replace the current one. It should be more flexile than now,'' he said.