Evaluating the Stock Market

The plummeting stock prices in the United Statest have affected almost all of the world's stock markets. They certainly influenced the Korean stock market which fell by more than 90 points in one day. People are concerned about the future of the Korean stock market.

The slump in the domestic stock market is a result of the imbalance between supply and demand; meaning there are more sellers than buyers in the stock market.

It was foreign investors who supported the increases in stocks in January, February, and March. However, these foreign investors are now reluctant to invest in Korean stocks. The proof: foreign net pruchases of stocks went up to $3.5 billion in March but the total as of April 12 was no more than $360 million.

The real problem is that the decrease in stock purchases by both domestic and foreign investors does not seem to be a passing phenominon. For the market to return to its former levels, domestic institutional investors would have to replace the foreign investors' money and play a more active role in the stock market, but they can not. As securities' market value assessments are scheduled for July, followed by the restructuring of investments and trusts, domestic investors are busy caring for their invested money and have no room for additional large investments. Moreover, private investors are rushing to institutions to ask for redemption on their investments.

Based on the imbalance in supply and demand of stocks, an analysis indicates that the sharp decline in the American stock market pulled Korean stock prices down. The current NASDAQ index is 18 percent lower than at the start of this year, however, it is 30 percent higher than last year. There still remains the possibility of additioal price restructuring. Therefore, the NASDAQ will not help increase Korean stock prices. The future of the Korean stock market may seem very gloomy.

However, there are a few points to think over. Technically, the composite stock exchange index is staying at 700 points, as high as it was one year ago. Two years ago, at the peak of the financial crisis, the composite stock exchange index remained at 500 points.

It is then necessary to consider other financial conditions; foreign reserves are over $85 billion, inflation rates are fluctuating within 2 percent, and the economic growth rate in the first quarter was calculated to be 12 percent.

Some are concerned over an overheating economy and inflation. However, the real ecomic growth rate is expected to be only five percent after inventory adjustment, and we may not have to worry about possible governmental retrenching of finances.

Though indexes on the KOSDAQ returned to the levels of one year ago, the indexes of venture companies are 60 percent higher than last year, and there is the possibility of a large scale decrease. However, the venture indexes are moving around the half way point between its zenith and nadir. Therefore, the range for additional decreases may not be as wide as investors believe. Some items have already dropped by 60 to 70 percent.

Therefore, one traditional lesson for successful stock investment remains: purchase earlier than others at low stock prices, and never follow the activites of other investors. The Korean stock market is especially hard to trade in when market conditions suddenly change, but this may mean that now is the best time to purchase stocks.

by Kwon Sung-chul