Stock market activity raises a flag

The total volume of stock transactions in the first half of the year was the smallest in eight years, largely due to the slowing economic recovery. This is raising concerns that profitability at local securities firms will deteriorate further after many of them already tightened their belts through corporate restructuring and voluntary retirements.

According to data from the Korea Exchange yesterday, from January to June a total of 666.8 trillion won worth of stocks were traded, down 12.5 percent from last year. The previous low was in the second half of 2006, when 530.4 trillion won worth of stocks were traded. The total number of stocks traded also dropped 32 percent over the same period to 69.4 billion shares.

The restrained investment climate, analysts note, is because of doubts about the strength of the economic recovery coupled with a gloomy growth outlook and companies’ aversion to investment. The Korea Development Institute lowered Korea’s economic growth outlook for this year from 3.9 percent to 3.7 percent. Hyundai Research Institute also lowered the rate from 4 percent to 3.6 percent. The Bank of Korea is expected to announce its own revised growth forecast later this month and many analysts expect it to lower its figure. In April, it forecast 4 percent growth this year.

The drop in transactions, meanwhile, is reflected in the stagnant Kospi index, experts say. At the start of the year, the Kospi was 1,967.19, while on Monday it closed at 2,002.21, an increase of only 1.8 percent. Analysts from major research centers says that the second half will be no different, although there are hopes that the government, under Choi Kyung-hwan, the new finance minister and deputy prime minister for the economy, will roll out a number of short-term policy measures to boost the economy.

“Ever since the Sewol ferry accident, domestic spending has showed no sign of increasing,” said Hong Sung-kook, head of research at KDB Daewoo Securities. “This could lead [the government] to inject some policy morphine [short-term stimulus].”

Even if the government introduces a package of measures to revive the economy, it remains to be seen if they will be able to offset unfavorable factors that affect the local stock market, including lower performance estimates of Korean companies as increasingly burdened exporters remain vulnerable to the strengthening won. This in return would make it more difficult for them to expand investment. Foreign investors that have also been very active in buying Korean shares have turned away from the local stock market as more capital is flowing in to advanced countries with economies that show signs of recovery.

“The economic recovery of major advanced countries is centered on domestic spending in their own respective countries,” said Shin Dong-seok, head of research at Samsung Securities. “This is affecting export growth of local companies. Spending in Korea also has contracted and is expected to continue for a long time as there are no signs of recovery after the Sewol ferry accident.”

Shin also noted the appreciation of the Korean won as a hindrance to business growth.

During such hard times, noted Yang Ki-in, head of research at Shinhan Investment Corporation, it’s difficult even for institutional investors to make a profit from stocks.

“As for retail investors, they should make short-term investments by buying shares when the benchmark index falls to 1,900 and sell them if it rises to 2,000 level,” he said.

BY LEE EUN-JOO, JEONG SEON-EON [angie@joongang.co.kr]