'Korea should brace for prolonged market turmoil'

Xu Xiao Chun of Moody's Analytics

By Lee Kyung-min

Korea may face prolonged market turmoil as lingering uncertainties caused by the U.S.-China trade war will weigh on investor sentiment, experts forecast Tuesday.

They expect both stock and currency markets to undergo wild fluctuations for a while as foreign investors are likely to continue dumping local shares as the won weakens against the dollar.

They said the Korean market will be more volatile than others as the country's export-reliant economy is dependent on global economic and financial sentiment.

Xu Xiao Chun of Moody's Analytics said the Korean economy as well as its equity market may experience severe, long-lasting consequences along with the overall slowdown in world trade.

“Now that the threatened tariff rate hike is set to go ahead, the Asia-Pacific region including Korea will take a significant hit given their economies are linked to the Chinese supply chain,” he said.

“The U.S. also threatened to raise tariffs to 25 percent on an additional $300 billion in Chinese imports. Understandably, equity markets have reacted negatively to the worse-than-expected turn of events.”

Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis Global Market Research

Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis Global Market Research, concurred.

“The outlook is negative even if a mini-deal is reached since the market will not be convinced by that,” she said.

The negative views come after U.S. President Donald Trump decided, May 10, to push ahead with raising duties on $200 billion of Chinese products to 25 percent from 10 percent. In response, Beijing said it will impose retaliatory tariffs from June 1 on $60 billion worth of more than 5,000 American products to up to 25 percent from either the previous 10 percent or 5 percent.

The benchmark KOSPI dropped nearly 125 points to 2,081.84 Tuesday from the end of April. The Korean won closed at 1,188.50, down 1 won from a day earlier. It has lost around 20 won from 1,167 won, April 30.

Foreigners net sold over 950 billion won in shares in just the past four days, driving the setbacks of both stocks and the Korean won.

The Moody's economist believes even with countercyclical policy stimulus measures in the U.S. and China, economic losses will flow to almost all parts of Asia.

“If a deal is not reached to roll back the already announced tariffs soon, then we are probably looking at a 0.5 percentage point decrease in economic growth for both countries. Further bad news might be ahead for Korean car manufacturers as President Trump is considering raising tariffs on auto imports to the U.S.,” he said.

The experts said greater market fluctuations will be in store with the trade conflict uncertainty becoming increasingly heightened against the market consensus.

“Developments in the financial market up until last week alone caught the market by surprise as the mood about the trade talks was generally optimistic, with the consumer confidence index improving on a positive outlook on international trade and stabilizing employment conditions, but uncertainty is becoming the dominant investor sentiment,” he said.

Brian Coulton, chief economist at Fitch Ratings

Brian Coulton, chief economist at Fitch Ratings, said the uncertainty will continue, given the trade feud shows no signs of abating, which will further dampen growth prospects for China's economy.

“We had been deliberately cautious in our forecasts in not assuming U.S.-China trade tensions ease. It's hard to overstate the impact of China on the global growth cycle ― renewed weakening in China would rekindle financial market concerns about global growth risks,” he said.

“We earlier said if the escalation stops with the increase to 25 percent the $200 billion already subject to 10 percent tariffs, then we do not think there is too big a problem, but the worry now has become an escalated conflict pushing us further.”

Park Chong-hoon, chief economist at SC First Bank, said the conflict is bound to drag out, with both countries seemingly confident about their economies.

“It seems both countries have judged their economies can sustain a prolonged conflict to a degree with robust domestic demand offsetting the possible dent in the growth outlook,” he said.

The experts forecast that market volatility will linger until June when they say Washington and Beijing will seek a breakthrough at the G20 summit.

“The possibility to reach or break a deal is always there so we should wait and see how the things will unfold.”

The unfavorable development of trade talks is expected to put further downward pressure on the Korean currency.

“The steady fall of the Korean won has yet to reflect the additional tariff decision by the U.S.,” he said.

“With low expectations on Korea's growth outlook in the coming quarters, the won will see no immediate, significant spike in value.”