[viewpoint]The Worst Might Be Over, But Some Dips Still Likely

Last week the Kospi, Seoul's benchmark stock index, surged 7.8 percent to 560, with all sub-indices surpassing their respective moving averages. The strong performance of the Korean stock market can be attributed to three main drivers: reduction in the U.S. federal-funds rate, the Nasdaq rally and substantial net foreign buying. The unexpected cut in the overnight rate followed three prior reductions of 50 basis points since January. The surprising timing of the Fed action suggested its resolve to spur investments and improve business conditions, not only to jump-start the stalling economy but also to revive consumption, which was restrained by declining wealth in equity in-vestments. The rate cut provided, perhaps, a confirmation that the market has bottomed out in our equity markets as well as those of the United States. In the long-term, it is expected to improve business conditions.

The week began with the U.S. market bracing itself for a slew of disappointing earnings reports, especially from technology-related companies. Surprisingly, there were a number of positive first-quarter results, meeting or exceeding expectations. This was the catalyst that lifted the market until the rate reduction kicked in at mid-week, fueling the momentum that drove the Nasdaq above 2,000. The rally was led by the tech-bellwether Intel and other chip stocks along with technology-related companies. Favorable earnings reports buoyed old-economy issues.

In the local market, boosted by the positive events across the Pacific, foreign investors were net buyers of 777.8 billion won ($615 million) of Korean stocks last week. The foreign buying was concentrated on blue chips such as Samsung Electronics and SK Telecom. Samsung Electronics gained 10.6 percent for the week; SK Telecom, along with other undervalued shares such as those of brokerages and banks, also showed strong gains. Foreign ownership of Korean stocks surpassed the all-time high of 33.06 percent during January's liquidity-driven rally, and reached 33.91 percent by the end of the week.

For this week, the Kospi should move along with the U.S. market again. Due to last week's strong performance, the Dow and the Nasdaq should both enter a correction period. The momentum is expected to continue into this week, but considering the still-feeble macroeconomy, more earnings reports and other negative elements, a sustained rally seems unlikely. Nonetheless, considering the expected Fed rate cut in May and the realization of the market bottom, the size of the correction should be rather small. Influenced by the U.S. market, the Kospi should be volatile, fluctuating above the 520 line. Selling pressure could build at the 570-600 level; for the Kospi to withstand it another catalyst would have to emerge. The Kospi should move in the range of 520-580; the Kosdaq between 69 and 75.

Unlike the last rally, reversed abruptly by a declining Nasdaq, a weakening won, falling chip prices and overall weakness in the global economy, the current rally should continue as the negative factors of the first quarter are expected to turn positive. However, as a correction is expected, buying on a dip can be a profitable strategy in the current market condition. Should global economic risks lessen, blue-chip shares would rebound sharply.

－ The writer is an analyst at Meritz Securities Co.

by Kim Sang-chul