Trump bump starts to wear off

The market’s honeymoon with Trump appears to be over less than 100 days since his administration began.

Foreign investors have turned around from aggressive buying in the Korean stock market, a trend that has been ongoing since the start of this year, to offloading stock at an alarming rate this month. In the first 11 days of April, foreign investors sold off 480 billion won ($420 million) worth of shares on the main index, the Kospi.

Up until this month, foreign investors had bought nearly 7.5 trillion won in stocks.

The selloff has been going on for seven straight trading days, the longest stretch since January last year, when foreign investors dumped their shares for 14 consecutive sessions.

And as foreigners have gone on a selling spree, the Kospi has been struggling, falling for six straight trading days. The market slightly improved on Wednesday, adding 0.13 percent as foreign investors net bought again.

Market analysts have attributed the sudden change of heart this month to growing doubts over U.S. President Donald Trump’s ability to push through his business-friendly policies in Washington. Since his election in November until March this year, the S&P 500 index rose 12 percent on high expectations for his presidency, but the momentum has been rapidly losing steam of late.

Global inflation, which had been picking up since the second half of last year, has recently decelerated, and when consumer prices fall, investors lower their investment in riskier assets, which translates to decreased preference for emerging markets like Korea. This month, foreign investment in these markets has been shrinking.

Along with fading enthusiasm for Trump, Seoul’s financial market has the added factor of geopolitical tension with North Korea. The Pyongyang regime’s nuclear threats and U.S. Navy’s deployment of a strike group to the Korean Peninsula have rattled investors. “As additional provocations by North Korea are expected, there’s a possibility of the North Korea risk expanding,” said Lee Hyun-joo, an analyst at NH Investment & Securities.

South Korea’s currency, which had been appreciating against the U.S. dollar since the start of the year and attracting foreign investors, has begun to weaken again against the greenback as the U.S. Federal Reserve is cutting back on the assets it holds. The won’s value against the U.S. dollar appreciated 7.4 percent in March, but so far this month, it has dropped 2.7 percent, making stock denominated in Korean won unappealing to foreign investors. This downward trend is expected to gain momentum when the U.S. government releases its report on currency manipulators, which may include Korea, later this month.

As the selloff by foreign investors continues and the U.S. dollar gains strength, the Seoul bourse is struggling to find alternative investors to fill the gap. Institutional buying won’t be enough. “Institutional investors don’t have that focus that foreign investors have in purchasing shares,” said Kim Young-il, head of marketing strategy at Daishin Securities. “We could expect the Kospi to attempt advancing beyond its limited movement around June when the strengthening of the greenback eases.”

In the meantime, Jeong Dai, an analyst at Meritz Securities, recommends changing investment strategy to focus on stocks that are less affected by the foreign exodus. “Since February last year, foreign investors have led the rise of the Kospi,” the analyst said. “But that influence has been gradually shrinking. It would be best to invest in stocks with growth potential but little effect from foreign investors.”

Other analysts say it’s too early to tell whether foreign investors have completely turned to selling as Korean shares are still an attractive investment because they are undervalued. According to Meritz Securities, the price-earning ratio, which is the current share price to its per-share earnings, was 9.7 as of December, lower than the average ratio of emerging markets at 12.2 and advanced markets at 16.5.

But this might change as Korean companies’ performance is expected to improve significantly this year. Average profit growth is projected to be 28 percent, higher than the emerging market average of 18.5 percent and advanced markets’ 12.3 percent.

Meanwhile, the tensions on the Korean Peninsula as well as deepening conflict in Syria have increased the value of bullion. International gold prices rose to a five-month high of $1,274.20 per ounce on Tuesday, 1.6 percent more than the previous day.

BY LEE SAENURI, LEE HO-JEONG [lee.hojeong@joongang.co.kr]