Invest with Caution In a Touchy Market

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Invest with Caution In a Touchy Market

The Kospi, the main stock market index, pulled out a 1.1 percent gain last week thanks to the U.S. stock market rebound. The Korean equity market let out a sigh of relief Thursday as more contracts than expected were rolled-over to June after the futures and options expiry.

However, a number of leftover contracts were cleared up as the futures index worsened Friday. In the process, 180 billion won ($142 million) worth of program transactions drove the index down. Arbitrage selling declined significantly after the expiry, so the balance of supply and demand on the market should improve this week.

Still, stock market uncertainties are growing again. The U.S. stock market, whose bottom is uncertain with earnings warnings from large tech companies, should continue to burden the Korean equity market. The warnings and better-than-expected economic data re-leased late in the week soon outweighed the technical rebound. The Nasdaq composite index fell to near its 27-month low; it has lost roughly 60 percent in a year. The Federal Open Market Committee is to meet March 20 and another rate cut had been expected. But the latest employment report supports Chairman Alan Greenspan's view and the Fed may not make any aggressive move.

The recent rise of the benchmark three-year state bond rate and a weakening of the won also seem to work as obstacles rather than boosts to market stability. The bond rate, which briefly fell below 5 percent last month, soared above 6 percent after a government official's warning comments. Though high rates in the bond market usually lead investors to the stock market, we don't see that likelihood this time. As the possibility of an upward trend in the rate is not yet clear and nervousness lingers in the stock market, it is hard to anticipate that recent high bond rates could strengthen stock market liquidity.

The Federation of Korean Industries announced that the Business Survey Index reached 102.4 in March, after it had fallen below 100 six months ago. But doubt remains that the Korean economic downtrend is over, because the index for inventory has worsened .

Movements in currency markets are also unstable. The Japanese yen is at a 20-month low after government officials' comments that a weaker yen might be acceptable, and it is now threatening the won. A weak won could be positive for the early recovery of the Korean economy in which the export sector makes up a large portion. But an excessively weak won might lead to the outflow of foreign investment, which would be a blow to the Korean stock market, where foreign buying plays a significant role.

Thus despite the improvement in the balance of supply and demand on the market, uncertainties are fast growing and should burden the market this week. The lack of any catalyst also should set an upper limit to the market. Therefore, unless the U.S. stock market rebounds and maintains a stable trend, negative uncertainties could cast a pall over the Korean equity market. We continue to recommend caution in individual stock selection.

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The writer is a senior analyst from Market Strategy Department at Good Morning Securities Co.


by Hong Seung-tae

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