The Korea Composite Stock Price Index (KOSPI) closed at 1,891.32 points on February 5 to earn 0.24%, but the G2 shock is still going on. Under the circumstances, the key is how long and how much the global financial instability will affect the Korean stock market.
Baring Asset Management CIO and Senior Managing Director Park Jong-hak predicted that the Korean economy will be able to continue stable growth for a while, in spite of the instability, thanks to the recovery on the part of advanced economies and increasing domestic consumption. He also mentioned that the Korean stock market will be facing greater volatility than before, but distinguish itself from the other emerging markets by means of its robust fundamentals.
“The volatility in emerging stock markets has to do with those countries with chronic current account and financial account deficits and the problems, which are not solved in the short term, are likely to cause investors to keep withdrawing their money,” he said, adding, “The Korean market is expected to be subject to the volatility for a short while, but will move in a different direction down the road since the valuation, fundamentals and the pace of economic growth are forecast to be better than in last year.”
Allianz Global Investors Asset Management director Eugen Loeffler agreed with him by saying, “Stock is still a viable option if the global economic recovery continues, and the Korean market is relatively safe because it is a step aside from the risks arising from the emerging markets.” He continued, “It is forecast that investors in these markets will readjust their portfolios to be more aggressive in those with better economic fundamentals and Korea is likely to benefit from the adjustment, like it did last year, owing to its current account surplus and high foreign exchange reserves.”
In addition, many economists are mentioning that the current instability is unlikely to result in turmoil such as the Asian financial crisis in 1997 and the worldwide one of six years ago. “The values of the currencies of emerging countries have dropped 15% to 20% since the Fed made an announcement of the tapering of the quantitative easing policy back in May last year, and the flexible movement of the exchange rates is proof that the market’s self-regulating function is still working,” said Nomura Financial Investment Senior Economist Kwon Yeong-seon. “Emerging countries have come up with the countermeasure of interest rate hikes and lowered their leverage ratio for greater soundness since the Lehman Brothers disaster, both of which have reduced the contagion effect of a financial crisis.”
Mr. Eugen Loeffler also remarked that the current financial instability is quite different in nature from the crises of the past. “Unlike in the past, most Asian countries are less dependent upon external debt, thanks to the floating exchange rate system, high foreign exchange reserves, and the growth of the local currency bond markets,” he emphasized.
They advised that investors not be overly concerned about the economic slowdown of the United States and China. “The recent drop in the manufacturing industry index of the US can be attributed to the cold weather, and the other consumption side indices have been found to be rather solid,” economist Kwon said. He continued, “Also, market participants seem to be quite sensitive to the sluggish manufacturing indices of China, but this is something that had been anticipated earlier, with the Chinese government limiting credit expansion.”
They predicted that the Korean economy will benefit more from the advanced economies’ recovery as of late than from the downturn in emerging markets, too. “The decline in the low value-added export to emerging economies is being offset by the high value-added exports to the developed countries,” the economist added.