A Bumpy Outlook For Seoul Equities

The combination of weak consumer confidence and high inventories remains our chief concern going into the second quarter. We have yet to see anything that could be construed as a catalyst to boost the equity market going into the second quarter. Earnings visibility is poor, as the severity of the current slowdown is unpredictable. M3 growth in Korea has collapsed to historic lows just as in Japan, hinting at similar liquidity-trap effects. Major signposts for the second quarter should be linked to any evidence of a de-stocking process and major asset sales by Korean corporations.

The expectations of a liquidity-driven market for Korean equities proved unfounded for the first quarter of 2001. Korea continues to face the challenge of managing both its supply and demand problems at the same time. Moreover, we retain the view that the odds of a liquidity-trap effect for Korea like that in Japan are rising, although it is not yet as significant as the Japanese trap.

Adding to these woes is a synchronous slowdown of the world's two largest economies. We continue to believe that the Korean market will see intermittent bear-market rallies. Barring the likelihood of a full-fledged global recession, we would be interested in buying top-line blue chips in the index of 510-540 and be prepared to take profits, once the Korea Composite Stock Price Index reaches beyond 600 points.

Korea has been on the upturn of its inventory cycle during the past 18 months, with excess capacity problems still outstanding across a range of products. Meanwhile, private demand prospects look shakier than before the 1997 crisis.

Korea has been relying more than ever on net exports to sustain robust economic growth rates since 1998. However, the U.S. equity markets suffered sharp corrections over the past month, indicating that investors are now worried about a U-shaped recovery, while pessimists are raising the possibility of a global recession. A simultaneous slowdown of the world's two largest economies should take a toll on economic growth prospects for Korea. Sales to Japan and the United States tend to constitute about 33-36 percent of Korea's exports.

On the liquidity front, it should be noted that M3 growth rates in Korea have fallen to historical lows. This seems mainly due to the combination of liquidity preference by retail consumers and the financial intermediation problem linked to the bond market collapse.

Implications for the equity market are easily drawn. Lower M3 growth rates mean that the total market value in each market looks relatively expensive as compared to M3. To us, this ratio for Korea looks fair at around 30 percent, indicating that from a pure liquidity standpoint, the Korean market does not look that cheap.

Key near-term signposts in the second quarter will center on inventory adjustments and large-scale asset sales or debt restructuring related to Daewoo Motor and/or Hyundai Electronics.

－ The writer is an executive director at UBS Warburg Securities Limited Seoul Branch.