Decoupling the new reality

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Decoupling the new reality

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The local bourse is showing no response to the ups and downs in global stock markets, whether it be the surging of the United States or the plunging of Japanese shares.

On Thursday, when the Dow Jones Industrial Average hit a record high on signs of improvement in the U.S. economy, the Kospi index increased just 0.21 percent.

The so-called decoupling phenomenon, in which local stocks head the opposite direction of stocks in advanced economies, has occurred since last year. In 2013, the United States’ S&P 500 index surged 29.6 percent while Japan’s Nikkei 225 gained 56.7 percent, but the benchmark Kospi remained flat, edging up 0.7 percent.

In the past, there was no decoupling phenomenon. In 1992, when advanced countries led the growth of the global economy, the Kospi gained 11 percent, then 19 percent in 1994.

Experts expect the decoupling phenomenon to persist this year and that it will be difficult for the local stock market index to rise, following the trend of developed countries.

They note the so-called “spillover” effect of the economic recovery in advanced countries has diminished for Korea compared to in the past.

Before, when the economy of developed countries started to recover and global economic growth increased gradually with expansion in consumption, the earnings of Korean exporters followed suit.

However, after the global financial crisis in 2008, the cycle of the U.S. economic recovery - leading to an increase in consumption and then to an expansion of exports for emerging countries and finally to their economic recovery - has become weak.

Also, unlike in the past when the United States posted significant trade deficits, current policy is focused on reducing imports and boosting manufacturing. The result is a loss of economic steam for export-reliant countries like Korea.

“The competitiveness of U.S. manufacturing has gone up while labor costs in emerging countries have also increased,” said Shin Hwan-jong, a researcher at Woori Investment and Securities. “It will be difficult to expect the advanced nations’ economies to benefit the economies of emerging countries like they did before.”

Jeon Min-kyu, a researcher at Korea Investment and Securities, echoed that concern.

“Although Korea’s exports to the United States will increase, the industry sectors that will benefit the most will be mainly mobile electronics and automobiles,” said Jeon.

Experts also note that the recovery in the U.S. economy can be both good and bad for the local stock market because the more rapidly the U.S. economy improves, the faster policy makers will reduce the Federal Reserve’s bond-purchasing stimulus program. And capital that has been invested in emerging countries will flow back into the United States, which could cause a shock to interest and currency rates.

“Although foreign investors will not take out their capital rapidly from the Korean market when the U.S. tapering of quantitative easing measures begins in earnest, there tends to be a high dependence on foreign investors in the local stock market, and there is concern that even a little shock would bring volatility in the market,” said Kim So-hyun, a researcher at the Korea Capital Market Institute.


BY CHO MIN-GEUN, LEE HAN-GIL [angie@joongang.co.kr]

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