Financial Market Instability in Asia
Economists’ opinions are split on what will become of the recent instability in the Southeast Asian financial markets. Some are saying that the Korean market will be able to distinguish itself because it has stronger fundamentals than Southeast Asian nations in general, while others warn that foreign funds could flow out if the United States discontinues its expansionary monetary policy and exports to the ASEAN region decrease.
Short-term Risks are Unavoidable in Korean Stock Market
On August 21, the KOSPI fell 1.08%, or 20.39 points, from the previous session of 1,867.46 to dip below the 1,860 point mark for the first time since July 16.
Foreign investors who had recorded a net buying position on the preceding day in spite of the plunge of the index, changed their stance to record net sales of 145.4 billion won (US$129 million). The size of non-arbitrage program trading amounted to 262.5 billion won (US$233.9 million) as well, close to triple that of the previous session.
Under the circumstances, an increasing number of market experts are adopting a conservative position, concerned about the Fed’s exit strategy from quantitative easing and fluctuation in the Indian and Indonesian money markets. “We need to focus on the Korean economy’s high dependence on exports to the regions and global liquidity conditions, although the financial crisis in Southeast Asia is unlikely to spread to Korea right away,” said Park Sang-hyun, senior economist at Hi Investment & Securities. The two countries are not expected to overcome the instability immediately, as their current account deficits and short-term deficits are on the rise. Besides, they are likely to take a further hit once the supply of liquidity reduces in earnest to accelerate capital outflow, and monetary risks emerge again in China in or around September.
In addition, they are interpreting foreign investors’ current trading trends as the signs of a selling spree based on past data. Foreigners have bought spots in a couple of trading sessions recently, but shown a net-selling position during the same period in non-arbitrage program trading. “The same trend has been found three times since 2012,” said Tong Yang Securities analyst Lee Joong-ho, continuing, “It resulted in a selling spree by foreigners and a drop in the index without exception.”
Strong Fundamentals Likely to Provide a Chance to Be Distinguished
On the other hand, it is also said that the impact would not be that huge, because the Korean economy has strengthened its fundamentals since the Asian financial crisis of the late 1990s. As a matter of fact, emerging economies’ stock markets are moving in different directions nowadays between those with favorable economic indices and the rest.
The index has plummeted 83.2% and 52.8% in India and Indonesia respectively since the Fed mentioned an exit strategy for the first time. Both countries have a high ratio of current account deficits to GDP. Last year, the percentage was 5.1% below zero and 2.8% below zero each for India and Indonesia. Meanwhile, Korea’s stock price index gained 64.8% during the period, the highest in Asia, thanks to its continuous current account surpluses, low ratio of short-term debts, and sound foreign exchange management.
Korea’s exports to emerging nations, including Southeast Asian ones, have continued to go up, and thus the countries’ financial turmoil as of late could act as a roadblock to further increases for the time being. Nevertheless, not a few economists are anticipating that the crisis could create a chance for the Korean stock market to increase its attraction. Their prediction is buttressed by the stable movement of the won with the other emerging countries’ currencies fluctuating due to the waning of Abenomics and concerns over the exit strategy.
“Korea is categorized as an emerging economy, but its economic fundamentals are more like those of advanced countries,” Hyundai Securities economist Lee Sang-jae explained. He emphasized, “The current risks in Southeast Asia will make the Korean stock market look more attractive in the end, with the country enjoying an economic rebound, a massive current account surplus, and a low inflation rate.”