Volatility in the Korean stock market is on the rise due to external factors such as foreign investors taking their money out from Korea-related funds. Meanwhile, concerns over a possible earnings shock for the second quarter of this year are causing investors to take a low profile. The market, which was one of the best choices for global fund managers until recently, is losing its appeal when compared to its Chinese and Japanese counterparts.
It is for these reasons why stock market insiders are paying keen attention to the Congress speech of Federal Reserve Bank (FRB) Chairman Ben Bernanke scheduled for two days from July 17 (local time). His remarks regarding monetary policy are expected to have a greater influence than ever before.
Another Blow to the Market?
According to financial research firm Morningstar, Korea currently accounts for 7% of global funds investing in emerging economies. The figure reached 8% not long ago as Korean companies sharpened their competitiveness in the wake of the global financial crisis back in 2008. However, the figure has been dropping since the latter half of 2012, with risks related to China getting worse and the United States’ exit from quantitative easing on the horizon.
There have been various cases of the FRB Chairman’s remarks jolting the domestic stock market. For example, he mentioned a specific timetable for restrictive monetary policy on June 20, causing many Asian stock markets to plummet, including Korea. Secondly, his remarks at a Federal Open Market Committee (FOMC) meeting that the committee could mull over some reduction in asset purchase before the end of the year sent shockwaves to stock, bond and foreign exchange investors alike. On July 11, the market gained approximately 3% after moving sideways for a while. The reason for this sharp upswing was believed to be his remarks that economic stimulus measures still have an important role to play for the time being.
Insiders are predicting a similar reaction this time. According to them, the ball is now in the court of the FRB Chairman as China recorded a GDP growth rate of 7.5% for the second quarter of this year; meeting the expectations of market participants. The positive index allowed the KOSPI to rebound by over 1% to 1,887.49 points.
“It seems that the chairman will mention the necessity of slowing down quantitative easing during his economic forecast speech,” said IBK Investment and Securities researcher Kim Soon-yeong, adding, “Still, he is expected to reconfirm that the full-scale implementation of an exit strategy will take more time.” Lee Soo-jeong, a research analyst at Korea Investment and Securities, echoed this, saying, “Investors are already well aware of the fact that the expansionary monetary policy will not last.” She went on, “Favorable economic conditions will increase expectations about a base interest rate hike, which is the second step of an exit strategy, and it will become an important variable for H2 this year along with the stance of the next FRB Chairman and the FOMC’s policy orientation.”
In any case, the most significant variable is investment by foreign investors. Many watchers are pointing out that a different approach needs to be taken to interpret the current change in the supply and demand of foreign funds, that is, the recent selling spree is grounded on long-term reasons such as a decrease in growth potential rather than investment portfolio adjustment or fiscal exit strategy. As a matter of fact, the local initial public offering (IPO) and M&A markets have remained stagnant for years. Furthermore, what little investments that are being made are becoming more and more concentrated on major companies such as Samsung Electronics.
“The US economy seems to have hit the bottom, but the story is different for the Korean economy when the decoupling trend that appeared at the beginning of this year is taken into consideration,” said Samsung Securities analyst Kim Yong-koo. He added, “Momentum is hard to find with anxiety over the future of the local stock market reaching its peak and the possibility of selloff is all around as risks are becoming evident both at home and abroad.”