Brokers offer tips for boxed-in market

Starting from 1,967.1 and ending at 2,002.21. That is the entire movement of the Kospi index in the first half of the year. The nation’s main stock exchange rose 1.8 percent and has been fluctuating in the 2,000 range. But will the situation change in the second half of the year? Unlikely.

That’s the projection of heads of research centers at major brokerage firms. The only difference is that the upper range of the Kospi is expected to be higher, with the range of the main bourse between 1,900 and 2,200.

Major brokerage firms expect the second half to be an extension of the first due to the presence of factors that will both help raise the market and shackle it. The European Central Bank last month supplied liquidity to the market for companies and households by lowering the borrowing rate and launching long-term refinancing operations worth 400 billion euros ($546.2 billion).

Although the U.S. Federal Reserve continues to taper its quantitative easing, it has been holding back from raising interest rates. Japan also announced a growth-oriented strategy that lowers the corporate tax and increases the Government Pension Investment Fund (GPIF) stock investment.

The liquidity supply to the market largely from advanced economies is a positive sign for the Korean stock market. Additionally, there is a growing expectation that the finance minister nominee, Choi Kyung-hwan, will roll out stimulus plans.

“As the domestic market’s sluggishness since the Sewol tragedy continues, short-term stimulus measures are likely,” said Hong Sung-guk, head of the research center at KDB Daewoo Securities.

But there also are factors that could restrain the Kospi. As it was in the first quarter, companies’ second-quarter performance outlooks are expected to be adjusted lower as the strengthening won burdens the bottom line of major companies. Another risk is the shrinking investment by retail and foreign investors.

If the sluggish domestic demand results in decreased imports, “this would likely further strengthen the won and may further worsen companies’ performances,” said Shin Dong-seok, head of the Samsung Securities research center.

When the market is in a bullish rally, almost all stock values go up, and retail investors can easily make a profit. But when market fluctuations are boxed into a specific range, the situation is different.

“It is not easy even for institutional investors to make a profit,” said Yang Ki-in, head of the Shinhan Investment research center. He said he advised retail investors to make indirect stock investments using financial products such as equity funds. “It is advantageous [at this point] to make short-term investments and buy stocks when the index falls to 1,900 and sell when it goes up to the 2,000 range,” he said.

Market experts say that when making a direct investment, it is essential to diversify using a strategy that is both aggressive and defensive.

It is best to invest in stocks that would benefit most from recovering advanced economies such as semiconductors and automobiles, as well as those that are dependent of the domestic market such as construction and banks and likely to rise once the government releases stimulus packages.

As for more conservative defensive investments, brokers recommend stocks with stable dividend payments.

“When the market is moving in almost a straight line, it is difficult to make a profit from the rising stock market and at times like this the companies are pressured to pay dividends to attract investors,” said Lee Chang-mok, head of the research center at Woori Investment and Securities.

“When considering that the Korean won appreciation will continue, it is better to adjust one’s portfolio to focus more on companies whose main businesses are concentrated in domestic markets,” said Lee Joon-jae, head of the Korea Investment and Securities research center.

Brokers’ advice for the second half is to invest in advanced economies over emerging markets. The U.S. economy, which saw growth that fell short of expectations in the first three months of the year, has enjoyed improving indicators since April. Market experts say the economic expansion will go into full mode in the third quarter.

The outlook for Europe is also optimistic, as market experts project similar growth in the second half thanks to the injection of liquidity by the European Central Bank.

“Korean retail investors have a tendency to overly concentrate their stock investment on the local market,” said Shin at Samsung Securities. “I advise investors to increase their investment in advanced economies.”

But not all agree. Hong of KDB Daewoo Securities said there is a risk the U.S. market could retreat after rising 25 percent last year, but only slightly in the first half.

“I recommend the Korean stock market that has failed to join [the rest of the world’s bullish trend] last year over advanced economies with bubble risks,” Hong said.

BY chung seon-eon [ojlee82@joongang.co.kr]