As foreign investors return, market rally invites caution

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As foreign investors return, market rally invites caution

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The benchmark Kospi rises above 1,950 points during early trading yesterday, showing a bullish run after the Lunar New Year holiday. A dealer is shown in the photo at the Korea Exchange Bank headquarters in Jung District, central Seoul. The Kospi readjusted to close at 1,952.23 points, or a 0.12 percent gain from Friday. [NEWSIS]

The domestic stock market hit a six-month high in January despite grim projections that it would fare badly in 2012, as foreign investors have returned to emerging Asian markets with a vengeance following recent volatility led largely by euro zone jitters.

But analysts warn that the rapid ascent of stock indexes in such a short space of time invites caution.

Yesterday, the benchmark Kospi rose as high as 1,973 points during early trading before being readjusted to close at 1,952.23 points, or a 0.12 percent gain from Friday.

Since ending the first session of 2012 at 1,826.37 points, the primary index has seen an unexpected rally of 6.9 percent in little more than three weeks. This brought it closer to 2,000 points yesterday than at any time during the last six months, after it fell below the psychological threshold that is seen to signify investor confidence on Aug. 5.

The rally owes a lot to foreign investors’ strong buying streak this year. Yesterday, they snapped up a whopping 939.5 billion won ($834.3 million) in local stocks, which kept the index edging up despite a wave of selling by institutional investors. In total, foreign investors have bought a net 5.3 trillion won in Korean stocks this year, keeping up a 10-session buying streak since Jan. 10.

Local analysts believe investors were tempted to return to Korean stocks after pulling their money back home during the financial turmoil that began last August as banks from advanced nations now hold more borrowed cash, freeing up liquidity.

“On Dec. 21, the European Central Bank [ECB] carried out its long-term refinancing operation that amounts to a qualitative easing,” said Han Dong-wook, head of the asset allocation team at Hyundai Securities.

With the operation, the ECB has effectively given cash-strapped banks in Italy, Spain, Ireland, Portugal and other nations access to a total of 489 billion euros ($637 billion).

“This eased what had been a short-term liquidity crunch in the region by providing three-year loans at a very low interest rate to stave off a systemic shock. But European banks that received the funds appear to be trading heavily in risky assets such as European sovereign debt and emerging market assets.”

The influx of foreign money was not only seen in Korea, but in emerging Southeast Asian markets as well. The stock markets of Indonesia, India and the Philippines have seen net buying increase by a considerable margin this year, while net purchases by foreign investors at the benchmark index in Japan rose by $1.82 billion as of Friday, or by $1.03 billion in Taiwan.

With this, Morgan Stanley’s MSCI emerging markets index, which tracks market capitalization movements in 26 emerging economies, rose by 8.8 percent on Tuesday from Jan. 2 according to Bloomberg. This more than doubled the 4.3 percent increase over the same period in the MSCI world index, which covers over 6,000 securities in 24 developed markets.

The flood of money has also continued pouring into mutual funds investing in emerging markets. According to fund researcher EPFR, a net $3.7 billion was newly invested in global emerging market funds during the first three weeks of January. This far outstripped international funds, or funds that invest in any overseas company, which saw a $51 million decrease in investments over the same period.

As for whether the rally will last, analysts said that the foreign buying streak is likely to perpetuate market momentum and encourage higher prices.

“What we’ve seen during the last few days is a liquidity-driven market, and in the short term there aren’t many variables that can beat the gravitational pull of strong liquidity,” said Lee Joong-ho at Tong Yang Securities.

But experts still favor a conservative approach to investing, as the rapidly-heating nature of a liquidity rally makes it vulnerable to overseas events that could sour foreign investor appetite.


By Lee Jung-yoon [joyce@joongang.co.kr]

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