A recent slide in China's stock market and an upcoming rate increase in the United States will put downward pressure on Korean stocks for the rest of the year, analysts said Wednesday.
"Foreigners are likely to continue to withdraw their investments in Chinese stocks for three reasons: an imminent rate increase in the U.S.; a slowing growth in China despite the government's stimulus measures; and a lack of confidence in the Chinese market following the government's recent purchases of stocks to underpin the market," Samsung Securities analyst Kim Yong-gu said.
It does not stop there. He expressed concerns about the fallout from China on other Asian stock markets, in particular.
Moreover, rates increases in the U.S. will be the "hegemony changer" for global stock markets, he said.
For foreigners who run an investment portfolio composed of Chinese and Korean stocks, and developing market shares, they have good reason to exit those markets or reduce their investments there, seeking stable gains from a strong dollar, they said.
Korea is one of the markets which may suffer a massive capital flight once the U.S. begins to raise rates as early as September.
"There will be a reduced liquidity in the market following U.S. rate increases. The dollar will strengthen further and other currencies, including the Chinese yuan and the Korean won, will weaken, pushing down demand for equities in the two countries," LG Economic Research Institute economist Cho Young-moo said.
A weak won is widely believed to help exporters as the value of their dollar-denominated earnings inflates when converted into the local currency. But that case is not always the truth.
"In fact, Korean exporters used to have stellar performance when the won was strong against the dollar. The won would strengthen when foreigners had a positive view of Korea's economy and its fundamentals," he said.
Moreover, sluggish demand from China, Korea's biggest trading partner, and tougher competition with Japanese rivals in major markets will remain a headache for Korean exporters such as steelmaker POSCO and Hyundai Motor Group, analysts said.
On Monday, the Shanghai Composite Index plummeted 8.5 percent to 3725.56 in its biggest one-day loss since 2007, leaving it 28 percent below its June 12 peak.
Investor confidence in China is hurt by the government's attempts to engineer the stock market, which have sometimes ended with massive selloffs. China's central bank has provided liquidity to help securities companies buy shares. It is nothing other than uncertainty, not risk, which can be priced and hedged against, analysts said.
"What's happening in China's stock market may be no longer ‘none of your business' for Korea and emerging countries," LG economist Cho said.
Analysts said the benchmark Korea Composite Stock Price Index (KOSPI) will continue to move in a tight range until the U.S. Federal Reserve raises its key interest rate.
Samsung Securities forecast the main KOSPI index won't rise above 2,150 by August and 2,250 by the end of this year due to uncertainties involving China and the U.S.
On Wednesday, KOSPI edged down 0.1 percent to close at 2,037.62. It has risen 6.4 percent this year.