ⓒ YONHAP News

The South Korean stock market has been extremely volatile in recent weeks, losing 263 trillion won or about 239 billion US dollars in October alone. The benchmark Korea Composite Stock Price Index or KOSPI fell below the important 2,000 mark on October 29, and the secondary Korea Securities Dealer Automated Quotation or KOSDAQ also showed dismal performance as well. Though October finished with a slight rebound, there is still much pessimism surrounding the Korean stock market. 

Here is Lee Sun-yeop(이선엽), market analysts at Shinhan Investment Corporation, to analyze the recent market slump. 

The Korean stock market posted the sharpest decrease among major economies last month, propelling investors into a state of panic. From October 1 to 26, global stock markets, including the U.S.-based Nasdaq, fell by the low 10-percent range as a whole. But the KOSDAQ dipped 19-point-3 percent, the biggest decline among 30 major stock prices indexes across the world. The figure is even higher than the minus 12.3 percent of the Merval stock index of Argentina, which received a loan package from the International Monetary Fund. 

The KOSPI lost 13.4 percent during the same period, the third steepest decrease among major indexes. But taking both the KOSPI and the KOSDAQ into consideration, the declines in Korea were sharper than any other country in the world. October’s performance was the poorest since the global financial crisis ten years ago, when the main index plummeted about 20 percent. 

In October, the South Korean bourse experienced the worst setback since the 2008 global financial crisis. According to the bourse operator Korea Exchange, the Kospi closed at 2-thousand-29-point-69 on the last day of October, down 13-point-37 percent from the end of September. The Kosdaq also lost 173.60 points the same month. Mr. Lee now explains the backdrop for the stock market crash in South Korea. 

A sharp tumble in the U.S. stock market typically fuels a general preference for safe assets and avoidance of risky assets. Korean stocks, which comprise a significant portion of stocks in emerging economies, are regarded by many foreign investors as risky assets. Also, it is easy to sell Korean shares, compared to those in other emerging markets. Thus it is little wonder that investors dumped Korean stocks first. In other words, the Korean stock market was negatively affected by the difficulty and inconvenience in selling stocks in other emerging markets. 

There are other risk factors as well. For instance, the ongoing trade conflict between China and the U.S. is believed to have a direct impact on the Korean economy. Korea’s exports to China account for 25 percent of its total outbound shipments, and those to the U.S. make up over 10 percent. Given Korea’s heavy reliance on the two major economies for exports, an intense economic showdown between the two world powers has inevitably dealt a blow to the export-dependent Korean economy. 

The downward slide of the Korean bourse is attributed in part to rising interest rates in the U.S. Dollars are flowing out of global stock markets, but Korea seems to be more vulnerable to this trend since foreign investors hold a considerable amount of shares in the Korean stock market. Another downside risk is the protracted trade war between China and the U.S., both of which are Korea’s major trading partners, as Mr. Lee pointed out. 

In South Korea, large companies make up an excessively large portion of local industries. Samsung Electronics, for example, accounts for a high share of market capitalization, with its semiconductors comprising a key export item. 

South Korea’s ten most valuable companies account for more than 30 percent of the country’s stock market capitalization, and the combined market capitalization of listed companies belonging to five top conglomerates make up more than half of the nation’s total stock market value. Therefore, difficulties in some large companies may lead to a bearish trend in the local stock market overall. 

With market watchers questioning how long the semiconductor boom will last, shares of Samsung Electronics and those of relevant companies have suffered a sharp decline recently, pulling down the main stock price index. In addition, institutional investors cannot perform their role properly in filling the vacuum from heavy sell-offs by foreign investors.

Considering the high proportion of large companies in the domestic stock market, large-cap stocks like semiconductors, automobiles and bio products disproportionately effect the direction of the market overall.

In the past, domestic institutional investors could step in and prevent the market from falling in times like these. But at present there are no such investors to buttress the market. 

The National Pension Service, Korea’s largest institutional investor, traditionally protected the local stock market in difficult times such as the global financial crisis in 2008 and the European fiscal crisis in 2011. In those times, the pension fund absorbed shares offloaded by individuals and overseas investors to soothe market jitters and act as a safety-valve. But this year, the pension fund has been reducing its investment in the local stock market, shifting to net selling for the first time in nine years. 

Due to a mixture of unfavorable factors domestic and abroad, the South Korean market headed downward in October. And the prospects for the future are not very bright. 

It seems that various outside risk factors as well as local companies’ poor business performances have already been reflected in the stock market. So, I think an additional market fall will only be limited. But it doesn’t mean that there will be a big jump in stock prices. The trade row between China and the U.S. will likely be drawn out, while the Chinese economy itself is slowing. Some analysts say that the U.S. economy has reached its peak. Moreover, the rising interest rates in the U.S. will serve as another unfavorable factor. 

Taking these concerns into account, Korean stock price indexes will only rise to a limited extent, even if they manage to rebound. In other words, stock prices are unlikely to plunge or rise very dramatically. So investors should temper their expectations.

As Mr. Lee predicted, the Korean stock market this month is expected to avoid the depreciation it suffered last month. Still, the country should carefully watch external market-moving factors, such as a key interest rate decision by the Federal Open Market Committee this week, U.S. midterm elections November 6th, as well as a possible China-U.S. summit at the end of this month. 

Some analysts forecast the Kospi, which lost 314 points last month alone, may possibly rebound on the back of strong buying. But it is still necessary to formulate measures to stabilize the market, as the aforementioned factors may heighten uncertainties. 

For now, the government may encourage four public pension funds, including the National Pension Service, to increase their investment in the local stock market. It could also provide stock investors with more incentives, including tax benefits. 

These measures can ease a drastic fluctuation in the local bourse and stabilize investor sentiment to some extent, although they may not keep the index from falling. In this respect, I hope the some effective measures will be put into action quickly. 

Chairman of the Financial Services Commission Choi Jong-ku has said that the financial regulator will closely re-examine and activate a contingency plan for the stock market, if necessary. 

In essence, a bullish stock market is closely related to an economic boom. Along with measures to relieve market anxieties, Korea should focus more on bold regulation reform and innovative growth to strengthen the fundamentals of the local stock market.