KOSPI Index Returns to 1,800 Level After 27 Months

Korea’s benchmark stock index KOSPI topped the 1,800 level Friday, returning to its level prior to the global financial crisis in two years and three months.

Falling under 1,800 on June 10, 2008, because of the financial crisis, the index slowly rebounded from the latter half of last year and came close to hitting the level three times. The country’s high growth rate and the best business performance by Korean businesses in five years finally put the KOSPI over the top.

The index rose 18.22 points Friday from Thursday to close at 1,802.58, a yearly high and the highest since 1,808.96 on June 9, 2008.

Shares rallied from the morning thanks to the U.S. announcement of a significant drop in applications for unemployment benefits and a more-than-expected decline in its trade deficit for July.

Investors, who fear a “double-dip” recession in the U.S. due to a string of disappointing economic indicators in the U.S., began aggressively investing in shares, causing the New York stock market to see modest gains and giving momentum to Korean stocks.

Lee Won-seon, director of investment analysis at Taurus Investment and Securities, said, “For the time being, fund managers asked how big the possibility of a double dip is, but such a question has changed into what shares will rise,” adding, “The lower possibility of a double dip is encouraging investors.”

Advanced economies including the U.S. are suffering from lackluster stock markets despite lessening fears of a double dip recession. In contrast, Asian stock markets are seeing a continued rebound mainly due to constant inflows of global capital in Asian countries with strong economic fundamentals.

Shares in Indonesia, Thailand and India have kept rising after breaking yearly highs in July and last month. In particular, countries like Korea where domestic currencies are expected to strengthen are also seeing global funds aiming at capital gains flow in.

Foreigners net purchased shares worth almost 550 billion won (472 million U.S. dollars) Friday. The Korean won also appreciated to 1,165.70 to the U.S. dollar, a rise of 1.7 points.

Certain analysts say the KOSPI can rise to 1,900 or 2,000 by year’s end because share prices are at record lows in proportion to corporate profits (eight to nine times) and Korean companies are highly likely to post record business again in the third quarter this year.

If the IT industry picks up in advanced economies, the KOSPI is expected to see a further rally because IT shares account for more than 20 percent of the market.

The Korean economy got a huge shot in the arm from government intervention after the global financial crisis broke out, but the threat of a double-deep recession and inflation and adverse external factors remain. So the KOSPI still faces a host of obstacles down the road

Jeon Hyo-chan, a research fellow at Samsung Economic Research Institute, said, “As the U.S. economy has yet to recover, the Korean economy could suffer a downturn in the latter half of the year and Europe is still undergoing crisis.”

“The key is whether foreign investors continue to invest in Korean shares and this depends on economic conditions in the U.S. and China.”

artemes@donga.com imsoo@donga.com