Evergrande crisis to have limited impact on equity market: analysts

A man walks past the Evergrande Center in Shanghai, China, Tuesday. EPA-Yonhap

KOSPI apt to stumble after holiday amid bitcoin fall

By Lee Min-hyung

Korean stock markets ― which were closed for the nationwide Chuseok holiday break ― will experience corrections due to the rising default risk by China's Evergrande Group whose debt crisis has jolted global equity markets. However, the impact of the “Evegrande risk” should be short-lived, as key outstanding issues have already been factored in, analysts said Wednesday.

The benchmark KOSPI and secondary Kosdaq will resume trading Thursday after a three-day break. Wall Street and European investors were briefly weighed down by the risks from Evergrande's possible debt woes, dragging down major indices. Major European bourses, however, rebounded from losses Wednesday (KST), although the NYSE failed to do so.

Chinese shares decreased less than expected the same day as investors digested the news that Evegrande had discussed a coupon repayment with its bondholders. Despite these mixed global outcomes, persistent concerns about Evegrande issues could be a burden on the local equity market.

In addition, a sharp decline in the real value of major cryptocurrencies created downward pressure on the local stock markets. As of 2 p.m., Wednesday, bitcoin was traded at around 52 million won ($43,900) on the Bithumb exchange. Bitcoin has continued to drop since ending its upward momentum Saturday, as the Evergrande-sparked fear has weakened investor sentiment worldwide, resulting in a steep fall in the crypto market here.

Market experts and global credit rating agencies did not expect the Evergrande debacle to pose a serious enough risk to escalate into a Chinese version of Lehman Brothers. They claimed Beijing would intervene before it turned into a threat to the country's economy.

“We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy,” S&P Global Ratings said in a report released Monday. “Evergrande failing alone would unlikely result in such a scenario.”

This analysis confirms the likelihood of the Korean stock markets suffering only a short-term impact from the Evergrande risk.

“The Chinese group's default risk is unlikely to expand into a systemic risk factor to the country's financial market, as the Chinese government is showing little sign of providing any liquidity support to the company under the judgment that the local financial market will be able to absorb the shock from the possible collapse of Evergrande,” Hi Investment & Securities analyst Park Sang-hyun said.

Park said the local stock market would be more affected by any updates regarding tapering by the U.S. Federal Reserve. It remains to be seen when the Fed will unveil a detailed timeline on when it will start reducing asset purchases, but the market expects an announcement sometime around November.

As foreign investors prefer to rearrange their investment portfolios in emerging equity markets before or just after the beginning of tapering, the KOSPI is widely expected to undergo slight drop during the period.

Even if the Korean stock markets experience adjustments in September due to the China factor, some shares in the electric vehicles, biotechnology, healthcare and aviation sectors will gain momentum for additional an rally due to an optimistic business outlook for them after the pandemic comes under control, according to analysts.

“The stock price of L&F, the producer of cathode active materials key to manufacturing lithium ion batteries, is seeing upward momentum after reporting double-digit growth last week on a rosy outlook for the market,” said Yoon Hyuck-jin, an analyst at SK Securities.

However, stocks that are exposed to regulatory risks will face additional downward pressure. These include big tech shares, such as Naver and Kakao, which the government and the ruling party are stepping up criticism of over their excessive business expansion by taking advantage of their platform power.

Share prices of the two big tech firms suffered double-digit declines over the past few weeks amid the widening regulatory scrutiny.