Patience Urged in Prolonged Market Correction

Korea’s key stock index KOSPI fell below 1,800 during regular trading hours yesterday, but rebounded sharply.

Affected by the bearish U.S. stock market, the KOSPI slipped 32.18 points (1.76 percent) from Tuesday to 1,794.15 Wednesday morning. The market, however, rebounded in the afternoon due to the good performance of other Asian stock markets, including those of China and Japan. The KOSPI rose 18.24 points (one percent) from Tuesday to close at 1,844.47. The tech-heavy KOSDAQ increased 3.4 points (0.48 percent) to close at 712.71.

Though the Korean stock market shot up, its temporary fall under 1,800 negatively affected investor confidence. Most analysts have forecast that the KOSPI will not fall below 1,800 despite its continued downward movement since the beginning of the year.

The Dong-A Ilbo conducted yesterday a survey of head researchers at the nation’s 10 main securities firms about the prospects of the stock market. Most said the stock correction will continue during the first quarter.

Park Jong-hyeon, head of research at Woori Investment & Securities, said, “The global economic forecast might be trimmed and worry over inflation is mounting. Even worse, the subprime mortgage loan crisis of the U.S. has aggravated worry.”

On the prospects for the Korean economy, the majority of respondents said jitters over slowing consumption resulting from interest rate hikes will negatively affect stock markets. If interest rates keep increasing, businesses will face growing financing costs, which in turn will lower profitability. Also, higher interest rates will put a heavier burden on consumers and discourage spending.

KOSPI to Bottom Out at 1,700-1,790

Korea’s stock market is forecast to undergo a correction in the first quarter and begin recovering from the second. Respondents said the KOSPI will bottom out at 1,700 to 1,790.

Mun Ki-hun, head of research at Good Morning Shinhan Securities, said, “Korea’s stock market will keep fluctuating in the first quarter due to external uncertainty including worries over a U.S. economic slowdown. But, it will rebound from the second quarter since demand from Asian markets including China will increase and global liquidity will grow.”

Correction Could Last Longer

Other analysts, however, said the market correction will last significantly longer.

Kim Hak-ju, head of research at Samsung Securities, said, “Korea’s stock market will remain bearish since increasing prices in the global market could reduce global liquidity. I think it will take a long time for the stock market either to show off its attractiveness after a thorough correction or to begin rebounding in the wake of an interest rate cut.”

China’s Role in Stock Rebound

Analysts suggested that investors lower their yield expectations during the correction and diversify investment into domestic and emerging market funds.

They also urged investors to consider the recent setbacks in the stock market as a chance to buy stocks cheaper.

Kim Yeong-ik, head of research at Hana Daetoo Securities, said, “Investors don’t need to set a specific date when buying stocks. It is better to buy shipbuilding, construction, and steel issues on an installment plan if the KOSPI falls below 1,800.”

Mun of Good Morning Shinhan Securities said, “Noteworthy stocks include those closely related to China’s consumption growth and representative stocks in the finance, construction, and domestic service industries, which are expected to benefit from the deregulation policies of the incoming (Korean) government.”

aryssong@donga.com