2011 Stock Market Outlook

On the first trading day of the New Year, Seoul’s stock market hit a record high at 2,070.08 points. Until the bourse reaches the peak, it has suffered ups and downs several times. When the Korea Composite Stock Price Index (KOSPI) rallied breaking records day after day in October 2007, investors went crazy for fund products. The global financial meltdown, however, cast a chill over the frenzy pulling down the stock market index from the peak of 2,064.85 points to some 1,400 points by August 2008.

It was only the tip of the iceberg. The filing of bankruptcy of Lehman Brothers on September 15 signaled the beginning of the global financial crisis at full swing dampening investment sentiments all across the whole world. That year, the KOSPI closed the market at 938.75 points on October 24.

The stock market index made a rebound only in the latter half of 2009. As cash was drawn to emerging markets which showed quick recoveries, the KOSPI rose to the 1,700s by September. But, another shock from Dubai which declared a moratorium on November dealt a heavy blow to the index bringing down the figure by the largest margin in that year.

Going into the year 2010, the equity market got a smooth start but failed to regain enough heat in the face of the budget crisis from Europe. In the second half, however, solid fundamental conditions of Korean firms and their undervalued stock prices attracted foreign investors to the market. Since then, it has managed to ride out the “Triple Waves” of North Korea’s bombardment of Yeonpyeong Island, Europe’s budget crunch and concerns over China’s austerity measures. As a result, the KOSPI surpassed the 2,000 point mark on December 14.

Stock Price by Industrial Sector

While the KOSPI set a new record in three years in 2010, specific stocks showed different paths from three years ago. Large-cap stocks of exporting companies thrived while mid- and small-cap stocks mainly targeting the domestic market didn’t. The automobile, chemical and IT sectors were hot but the shipbuilding and construction sectors were not.

What’s most notable was the boom in the automobile and IT sectors. The two, along with the financial sector, were referred to as the “Three Ugly Brothers” for their poor performances even when the overall stock market thrived in 2007. The financial crisis, however, provided an opportunity for the three. By the ravages of the crisis, their rivals in advance countries failed to survive. Weakening won gave them another advantage in the price competition. The growing demand from emerging markets whose consumers wanted goods cheaper than those from advanced countries but better in quality than made-in-China products made them winners.

This is clearly shown in the comparison between the closing prices on the peak day of the KOSPI three years ago (October 31, 2007) and those of today (January 3). The automobile-related stocks were ranked high in the stock price growth list. According to the Korea Exchange (KRX), the stock price of Sebang Global Battery, an automotive battery manufacturer, jumped from 6,420 won in the late October 2007 to 33,650 won on January 3, 2011, representing the biggest growth (424.1%) among the KOSPI 200 stocks. Kia Motors were ranked 2nd (407.3%), followed by Hyundai Mobis (227.6%) coming 4th and Hyundai Motors (149.3%), 7th.

The equity prices of Samsung SDI and LG Chem soared, too with 147.2% and 146.7% growth rates respectively. Samsung Electronics, one of the market leaders, showed a remarkable increase. Its stock price went up from 550,000 won in 2007 to 958,000 won on January 3, 2011 recording a new high at 966,000 won before market closing.

The financial stocks were excluded from the recent bullish market. Most financial stocks remained the same in terms of price with Hana Financial Group and Shinhan Financial Group registering negative growth of 2.4% and 4.4% each. Shipbuilding and construction stocks, which lead price increases until 2007, failed to recover to the previous peaks. Hyundai Heavy Industries, Samsung Heavy Industries, Daewoo Shipbuilding & Marine Engineering, Hyundai Engineering & Construction and Daewoo Engineering & Construction recorded negative growth rates of 13%, 26.1%, 36.6%, 20.4% and 53.8%, respectively.

2011 Stock Market Outlook

Korea’s stock market is now at an unprecedented phase. Although many forecasted that the country’s stock market would thrive this year, the KOSPI’s setting a new record on the first day of the New Year surprised not only the average investors but market observers as well. So far, the good first week of January has boded well for the whole year’s performance. Market watchers who initially predicted the highest point of the KOSPI at 2300-2400 points, seem tempted to raise their forecasts. They say there are nothing unfavorable to the stock market in terms of fundamentals, supply and demand and investor sentiment at least in the 1st quarter.

But the outlook is mixed for the period afterwards. “Since the financial crisis, exporting companies have led the stock market. But this will change,” said Kim Hak-kyun, head of investment strategies at Daewoo Securities. “There is a widest-ever gap in returns between Samsung, Hyundai Motors and LG group and the rest, which is not sustainable. When the won rises, financial and construction stocks and mid- and small-cap stocks will began rising,” Kim added.

Some think there is a possibility for a correction following a rapid growth. “An expectation for good annual results was reflected in advance on the index raising it to a higher level. An even higher index would create concerns over overheating,” said Oh Hyun-seok, head of investment strategies at Samsung Securities. According to Oh, a continued rise to the 2150 points would require investors to pay heed to a possibility of an overheating because the up market was only a result of the “January effect”.

“The growth of the won would not be that steep and the momentum of economic recovery is likely to shift from China to the U.S. boosting IT stocks,” said Oh Hyun-seok, head of investment information at Samsung Securities. “The recent interest rate hike by the Bank of Korea was to avert inflation for the sake of price stability, which is good for the stock market,” said Oh Sung-jin, head of Hyundai Securities’ research center. “The BOK took the first step for rate hikes which would not exceed 100 basis points this year. Higher interest rate is a burden on investment in bonds but serves as a positive factor for stock investment,” he added.

“Economic recovery in the U.S. will bolster the demand for consumer electronics boosting IT stocks. The bank stocks will be hot in that they are undervalued compared to their performances,” said Cho Byeong-mun, head of Eugene Investment & Securities’s research center.

Expressing concerns over the pace of the economic recovery in the U.S. Cho added, “While the stock market was led by the economic rebound in the emerging markets including China last year, the U.S. and other advanced nations will create the momentum for the bullish stock market this year.” He continued “Improvements in the U.S. job and housing indexes will add heat to the market into the latter half.” Cho predicted the stock market is likely to hit the 2350-2400 points in case such scenarios are realized. “If improved employment and housing indexes revive the consumer sentiments in the U.S., equity portfolio composed of recommended picks will turn 30% in annual returns,” said Cho.

Heads of investment advisories reached a consensus that a bull market will be the mainstream thus the stock indexes won’t slip just after reaching the 2,000 mark. They forecast that the ample liquidity across the world, domestic companies’ performances that surpass past results and the economic pick-up in the U.S. will serve as the engine. They agreed on the 2,350-2,550 points as the peak of the KOSPI this year. “The KOSPI will be able to reach the 2,350 points within this year assuming a 4 to 5 percent economic growth and a 7.5 to 10 percent improvement in the profits of listed firms,” said Seo Jae-hyeong, CEO of Korea Creative Investment.

But their opinions were mixed on the trajectory of stock prices. Some say the prices will keep rising while others expect them to be corrected after reaching the top in the first half. “Stock prices will remain more or less the same after peaking in the first half. The benefits from the bull market, which local companies have enjoyed, are likely to be shared by the U.S. firms if they expand investments and the liquidity may be heading toward the advanced nations,” said Kim Taek-dong, CEO of Lake Investment Advisors. “Many treasury bonds from Europe are due within the first half and program-related buying for dividends is waiting for clearing, which puts a pressure on the supply-demand balance,” said Kim Sang-baek, CEO of Leo Investment Advisory. “Stock prices which still have to go a long way to the peak will hit the highest point in the second half and then loss the steam,” he added.

Amid the dominant prospect for a bull market, inflationary pressure from the European budget crunch and rising commodity prices, China’s austerity measures and strong won were pointed as risks that can shake the market. The U.S. economic recovery was pointed as a significant variant that can turn the direction. “For now, it seems unlikely for the governments to take belt-tightening measures. If the commodity prices gain rapidly, however, it will prompt them to rush to do so which, in turn, will hamper the stock market,” said Park Kun-yung, CEO of Brain Investment Management.

Most of all, the financial sector was pointed to be hot in 2011 due to the inflationary pressure and the probability for interest rate increase. The IT and transportation sectors are expected to pick up as the U.S. economy regains momentum into the latter half. Analysts also predicted that the construction sector would gain boost as the deregulation issues emerge in the second half in the run-up to the presidential election slated for next year. They expected the automobile and chemical stocks to perform fairly well from last year into this year. “The economic turnaround in advanced nations will raise the prices of stocks sensitive to economic conditions overall. Meanwhile, long-term growth stocks will serve as leaders which keep growth momentum at any phase of the economy,” said Seo Jae-hyeong, CEO of Korea Creative Investment.

Agreeing on the overall picture, the heads of advisory firms pointed Samsung Electronics, Hynix and NCsoft as top picks for the IT sector. They cited the effects from the resurgence of the U.S. economy as the cause for picking Samsung Electronics and Hynix and the imminent release of a new blockbuster game for NCsoft. Hyundai Motors, which led the stock market last year, remained as the most promising pick in the automotive sector. LG Chem and OCI are reported to likely to benefit from the growing demand for alternative energy sources due to rising oil price. For SK Energy, improvement in the margin of petrochemical products due to the higher oil price will prove a boon. Global economic recovery and the resultant expansion of trade and shipments will benefit Hanjin Shipping and Korean Air. In the financial and construction sectors, which underperformed last year, KB Financial Group and GS Engineering & Construction were picked as most promising. Doosan Infracore and other machinery stocks were also cited as equities with growth possibility influenced by China’s investment in the sector.

Cho Byeong-mun, head of Eugene Investment & Securities’ research center, forecast Samsung Electronics and Shinhan Financial Group, representative corporations of the IT and banking sectors each, to generate high returns. “Samsung Electronics and Shinhan Financial Group are the only ones with opportunities for re-assessment of stock price in the country’s securities market,” said Cho. “It’s because the equity of Samsung Electronics is traded at no premium and Shinhan is applied with a Price to Book ratio relatively lower compared to the past,” he added.

He continued, “POSCO and other steel makers had difficult times due to the falling steel price globally last year. This year, however, will see the prices escalate against the global economic turnaround led by the US. In this sense, Hyundai Steel promises good results considering its increasing investment and the demand from within its parent group.”

Now, eyes are turned toward the direction and results of the country’s stock market, which surprised investors with unprecedented performance in the beginning of the New Year.