Stay on the Sidelines In Uncertain Times

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Stay on the Sidelines In Uncertain Times

Uncertainties are still lingering. The domestic stock market is still on its way downward, and more correction seems to be ahead because the market did not rebound at the 540 support level. The uncertainty over the recovery of the U.S. economy is a hurdle for the Korean stock market. Though the government is trying to lift the market with pension fund investments, systemic risks are exerting downward pressure.

High-tech companies such as Intel and Microsoft announced their quarterly earnings last week. Thanks to previously downgraded expectations, most of them met or beat analysts' targets, but the outlook for the second half is poor, and it will take some time for firms to bounce back to good profitability.

US economic data also showed a mixed picture. The number of Americans filing for unemployment insurance fell to 414,000 last week from a revised 449,000 a week earlier, but the figure still is well above year-ago levels and reflects tens of thousands of layoffs this year. The U.S. trade deficit shrank in May to a 19-month low, which underscores slowing demand for overseas goods. Yet the index of leading indicators rose in June for the third consecutive month.

Though Federal Reserve Chairman Alan Greenspan signaled in congressional testimony that central bank may cut interest rates for a seventh time this year, U.S. markets did not react. Investors are concerned with the prolonged slowdown, and are putting less emphasis on interest rate cuts. As corporate profits continue to fall, equities will not rebound soon.

Those effects are being felt here. The Korea Development Institute lowered its growth projection by 0.3 percentage points to 4 percent, mainly because of weak global growth prospects and declining exports, even though domestic demand is improving. Exports of electronics, like IT equipment and semiconductors, make up about 30 percent of total Korean exports, so we are feeling the effects of the global IT slump.

We need some external help if Seoul markets are not to decline further. The Nasdaq must stay over 2,000 points; the recent financial turmoil in emerging markets must not spread to Asia, and rebounding domestic blue chips must continue strong.

As these premises may not be easily met, the local stock market may see further corrections. One positive sign is that foreign investors have begun to buy blue chips again. Although they may be bargain-hunting, if it continues, the Kospi may stay stable.

Considering these uncertainties surrounding our equity markets, we suggest that investors not be too active right now. They should look toward the end of these uncertainties to judge the best time to reenter the market.

- The writer is a market strategist at Good Morning Securities Co.

by Hong Sung-tae

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