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Drifting Sideways despite Stock Market Recovery in Advanced Economies
Drifting Sideways despite Stock Market Recovery in Advanced Economies
  • By matthew
  • July 29, 2013, 07:59
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The Korea Composite Stock Price Index (KOSPI) remains locked between 1,800 and 1,900 points, unlike that of the United States and Japan which are showing signs of recovery, due to a lack of investment from foreigners. It seems that the trend of global funds flocking from emerging nations to advanced economies will continue for the time being. According to stock market experts, the Korean bourse is expected to be able to keep in-step with its counterparts in developed countries from Q4 this year at the earliest, when the recovery of the US economy and a following increase in domestic consumption are likely to produce some effects on the performance of Korean IT product and automobile manufacturers in particular.

Movement of KOSPI and Dow Jones Industrial Average Index (units: points).​On July 9, the KOSPI closed at 1,830.35 points, 0.74% up from the previous trading session. It has remained between 1,780 and 1,850 points for almost a month since it dipped below 1,900 points on June 13. Foreign investors continued with their selling spree for the fifth consecutive session that day, disposing of shares worth 101.3 billion won on July 9 alone.

In contrast, stock markets in developed countries are currently showing strong performance. The Dow Jones Index gained 0.59% on July 8 (local time) to reach 15,224.69 points and rising for three consecutive trading days, while the Nikkei 225 Index advanced 2.58% to close at 14,472.90 points the same day, and increasing by more than 1,500 points during the previous three weeks. Those in Germany (2.08%), France (1.86%) and the UK (1.17%) also showed upward tendencies.

At the same time, global funds are moving towards advanced economies. According to Hanwha Investment & Securities, funds worth US$5.282 billion in total flew into these regions last week, yet just US$0.7 billion flew into emerging markets. Furthermore, it has been found that US$140 million moved out of Asian markets, excluding Japan.

Industry insiders are ascribing this decoupling to the increasing appeal of advanced economies, which are currently showing some rebound. “The flow of foreign capital out of Korea is due to profit taking,” said Oh Sung-jin, director of the research center at Hyundai Securities, adding, “Although global funds are turning their attention towards advanced economies after taking some profits in emerging markets, they would return to the latter, especially Korea with its strong fundamentals, once such profit realization is completed.”

As a result, the question is when and on what conditions will foreign investors return. Stock market analysts are predicting that this will take place only when the share price of Samsung Electronics shows signs of improvement and the Chinese economy perks up.

“The Korean stock market has recently stumbled because of foreign investors’ selling of Samsung Electronics shares,” said Kiwoom Securities research center head Park Yeonchae. He went on, “However, unlike Apple, Samsung Electronics has a wide variety of products in its lineup and has successfully pursued vertical integration; therefore its sales will recover fast amid the recovery of the US economy, which means the stock price forecast is quite bright for the manufacturing giant and the KOSPI as a whole.”

However, Kim Ju-hyeong, who heads Tong Yang Securities’ Investment Strategy Team, warned, “One of the soft spots of the Korean stock market is that more than a few of the listed items are highly dependent on China.” He added, “The Chinese economy, however, is expected to remain slow until the upcoming 18th National Congress of the Communist Party of China scheduled for October, which could pose a burden on the Korean stock exchange.”

“Korea is found in an economic expansion cycle, unlike other emerging nations, in the Index of Leading Economic Indicators of the OECD for May,” said Kim, adding, “Since the Korea economy has just entered the expansion cycle, the stock market will show a gradual upturn for the time being.” Shinyoung Securities Research Center director Jo Yong-joon echoed this, saying, “The current rebound of the US economy does not immediately lead to increasing consumption and a positive effect on the Korean stock exchange, therefore, we will have to wait until the last quarter of this year at least in order to see the markets moving in the same direction.”