Oil price drop pushes Kospi down

As foreign investors turn to safer assets due to falling international oil prices, the Korean stock market has become highly unstable.

The Kospi fell below the 1,900 mark during trading on Monday and Tuesday, swept by concerns over global uncertainties including the lower oil price and signs of a slowdown in the eurozone and China. It was the first time since October that the main bourse has dipped below 1,900 points. Seoul’s main index barely climbed back above that mark on Tuesday as foreign investors expanded their selling spree.

The Kospi is vulnerable to geopolitical and financial risks around the world and has fallen 3.3 percent compared to Tuesday last week.

But even with the holidays approaching, it seems that the Kospi will be unlikely to rally this year.

When Finance Minister Choi Kyung-hwan took office in July, the main bourse soared to nearly 2,100 due to high expectations for his economic stimulus plan, but it fell back to the 1,900 range due to the slow pace of the economic recovery.

Stock markets in other emerging economies, including Greece, Portugal, Italy, Russia, Brazil and Saudi Arabia showed sharp plunges during the same period. Markets in advanced economies - the United States, Germany and United Kingdom - tumbled, too.

Global jitters were triggered primarily by the falling oil price.

In the past, a drop in oil prices often led to positive results. Lower prices helped boost demand for oil, contributing to recovery in the global economy.

Some believe that the current price drop will be economically beneficial. Christine Lagarde, managing director of the International Monetary Fund, said on Dec. 2 that the drop in prices will benefit the global economy overall, helping the U.S. economy grow 3.5 percent, up 0.4 percentage point from the institution’s earlier forecast.

But the downside of the tumbling oil price started to appear after the International Energy Agency said on Friday that daily demand for oil will decline next year. International investors began to focus on the sluggish demand for oil rather than the potential positive impacts of the price drop. Such sluggish demand could lead to another global economic slowdown, according to foreign investors.

“It is likely that the negative effects of the oil price drop could outstrip positive effects,” said Seo Dong-pil, a research fellow at IBK Investment & Securities. “When governments loosen their monetary policies, it is normal that prices go up. The falling oil price throws into question the effect of quantitative easing in major countries.”

The uncertainties were fueled by political risks in Greece, which will hold a presidential election on Dec. 17. The Greek radical left Syriza is expected to win. The party is strongly opposed to the current government’s austerity measures.

“The risks from Greece will influence market volatility until the year’s end,” said Lee Ah-ram, a senior researcher at Nonghyup Securities.

BY SONG SU-HYUN [ssh@joongang.co.kr]