Market gurus reassure investors in face of crisis
Kim Seok-dong, Korea’s vice finance minister, tried to allay market jitters by assuring investors. Lee Sung-kwon, chief economist at Goodmorning Shinhan Securities and Kwon Soon-woo, a research fellow at Samsung Economic Research Institute, also offered their insights.
Q. What do you think is the biggest factor pushing down the stock markets?
Kim: Since Korean stock markets recessed [Wednesday], the impact of the global market upheaval over the past two days is pummeling the local market. The overall situation seems to be stable.
Lee: We view shrinking liquidity stemming from continuing market uncertainty as the biggest factor. The local stock market boom has been fueled by corporate earnings fundamentals and ample liquidity. But the latest subprime credit woes have shattered the balance in stock market liquidity.
But local corporate earnings fundamentals still seem to be intact. Plus there are few ways to gauge the impact of the U.S. subprime mortgage crisis except for watching the movement of U.S. stock markets, which are not doing very well at the moment.
Kwon: Basically because of the subprime woes, mutual funds are withdrawing money from the stock market. Foreign investors have already withdrawn a considerable amount of their investment and foreign money continues to flow out. Investors are concerned about risky assets, such as stocks, and turning to safer assets.
What could the government possibly do in response?
Kim: What’s most important is stable management of the economy and securing enough foreign reserves. Currently, our economic growth is solid, and we have sufficient foreign reserves of $250 billion and strong international credit ratings.
Lee: The recent market rout is not stemming from the domestic situation, so there is little the Korean government can do other than assuage market panic by stressing that fundamentals are still healthy. The government seems to be doing pretty much everything it can.
Kwon: The current crisis is attributed to mostly external factors. There is no way for Korea to stop this. It can only reduce the impact. A sudden money outflow could cause a shortage of liquidity and a rapid rise in short-term interest rates. The government should be flexible about injecting money into the market.
A cut in the overnight call rate would not help the short-term liquidity shortage. Besides that, the Bank of Korea just raised the call rate last week.
What will be the possible setbacks of yen carry trade woes?
Kim: We estimate yen-denominated borrowing in Korea to be about $5 billion to $6 billion, which we don’t view as a massive amount. Our foreign exchange tracking system allows us to analyze the risks of the yen carry trade with relative precision. I can assure you that we do not need to worry about possible setbacks of the yen carry trade unwinding.
Lee: Investors are trying to unwind their yen carry trade investments since rising mortgage credit woes are pushing down U.S. Treasury yields, narrowing the interest rate gap between Japan and the United States and cutting potential profits of the yen carry trade. But I don’t think the yen carry trade will unwind dramatically since the Bank of Japan is likely to freeze the interest rate in next week’s policy meeting, meaning the yen carry trade will maintain its profit potential for a while.
Kwon: If the subprime crisis continues, it could affect the real economy in the long term. If the world economic growth slows, Korean exporters will suffer. A shortage of liquidity could weaken consumer expectations and reduce the values of assets.
Any future market prospects?
Kim: Like we said, we have very little exposure to subprime mortgage investment. So the issue is unlikely to bring down the whole local market. But government agencies are closely working to curb possible setbacks caused by worsening overall investment sentiment in the global market.
Lee: The BOJ’s rate-setting meeting will be a big turning point in the market. The BOJ is probably unwilling to raise the rate that will strengthen Japanese currency, squeeze local exporters and drag down local economic recovery. Then the yen carry trade will be unlikely to unwind anytime soon, meaning major market upheavals due to a yen carry trade unwind is unlikely to happen.
Kwon: The yen carry trade already peaked and now it is falling gradually. The value of assets could decline, but according to the government, the exposure to yen carry trades is not large.
By Limb Jae-un, Jung Ha-won Staff Writers [jbiz91@joongang.co.kr]
with the Korea JoongAng Daily
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