[VIEWPOINT] "Market Leadership" Falls Short For the Long-Term

The term "market leadership" is used to indicate an industry sector whose recent strength in terms of stock price gains encourages stock market participation in the overall stock market. Market leadership also informs us who among retail, institutional and foreign investors had the greatest impact, negative or positive, on the stock market in a given time frame. Market leadership, although an important aspect of stock market investing, should be treated as a tool like qualitative analysis, the study of stock price patterns, and should not be the sole basis to buy or sell a stock. Many retail investors in Korea assign far too much importance to market directions when they should be concerned more with things like profit estimates and shareholder equity.

Market leadership last month came from foreign investors who led a strong rally, with the KOSPI climbing 15.7 percent to 617.91 from 520.95, and the KOSDAQ surging 34 percent to 84.36 from 55.70. They posted record net buying in both bourses for the month. Interestingly, many of the stocks that they failed to purchase saw some of the month's biggest gains. For example, last year's winners like Daum and HaanSoft were up more than 170 percent and 250 percent, respectively, even after analysts had issued profit warnings on both firms.

Considering the record amount of foreign buying last month, the retail and institutional investors who bought shares in these two companies may prove to be the wiser if there is a broad market advance in February.

If retail investors in Korea invested more on fundamentals with a long-term horizon and less on catching a "wave" or riding short-term momentum, it would help reduce the volatility and abrupt price swings observed in the market. A stock in an ideal market, one left to operate under the laws of supply and demand with an effective policing body, should be treated like a real estate investment. Imagine the chaos in the real market in Korea if buyers and sellers sat in front of their computer monitors and day-traded property.

The market in February enters a consolidation period marked by powerful short-term advances and sharp declines. I see the market encountering resistance around the 650 level and buoyed by strong buying around the 600 level. Liquidity is still the driving force behind the market, with fundamentals becoming more important by the end of the year.

Forecasts of a projected slowdown in the Korean economy this year are already priced into share prices. Foreign investors already believe that the Korean economy will slow markedly, so the decision to sell their positions in Korean stocks will not depend much on the economy. Expect heavy foreign selling in the second half of the year if the worldwide D-RAM market fails to recover, the banking industry does not consolidate, corporations do not improve transparency, and M&A activity fizzles.

The writer is an investment analyst at Daishin Securities Co.

by Henry Lee