It’s all about the fundamentalsThe “tapering” plan - the eventual termination of heavy monetary stimulus in the United States - has sent shockwaves to financial markets across the world. U.S. Federal Reserve Chairman Ben S. Bernanke last week said the central bank likely will start to reduce its multibillion-dollar bond buying program later this year and end quantitative easing entirely by the middle of next year. Share prices tumbled and bond interest rates shot up around the world on the news that the Fed is poised to shut off the liquidity tap.
Under a selling spree by foreign investors, the Korean benchmark stock price index lost a whopping 3.4 percent during the two trading days since Bernanke’s statement. Though mild compared with the falls in other major emerging markets - 6.1 percent in Indonesia, 4.9 percent in Russia and 4.9 percent in Brazil - investor jitters linger in Korea. The massive amount of U.S. dollars that flooded emerging markets could finally be packing up to return home.
The New York Stock Exchange has recovered from its initial turbulence from the earthquake the Fed unleashed last week. But analysts believe that the tremors and aftershocks will continue for a while. In that case, volatility in global markets will eventually spill over to local markets.
Fortunately, Korean authorities maintain foreign exchange reserves of $328.1 billion, and a surplus in the current account has been sustained for 15 consecutive months - in other words, the Korean economy has stronger fundamentals than other emerging economies. Another hopeful sign is that foreign investors in Korea are upping government bond purchases - while cashing in on local equities - instead of immediately leaving the country. Their investment in long-term government bonds suggests that foreign investors still have confidence in the Korean economy.
The Bernanke shock may not have the same damaging effect on our markets as the financial meltdown in 2008. The scaling down of quantitative easing also raises hope that the U.S. economy is doing better, which could help boost our export outlook. Authorities and players in the market need not fret over every surprise and upset in the market. Instead, they must concentrate on strengthening the economic fundamentals of our economy. The real fight begins when all the uncertainties clear up.