Taking stock of the market

“Should I invest in stocks or mutual funds?” “Am I getting in too late?” Those are common questions these days with the stock market finally breaking out of a protracted boxed range and the composite index rebounding past the 2,100 level for the first time in nearly four years. With interest rates at record lows, people no longer can depend on bank savings to prepare for their old age. So is it is too late to get in the stock market or not?

It is true the Korean bourse has finally shaken off a lengthy lethargy. Its biggest attraction is that shares are cheap. Major bourses elsewhere have been bullish for the past two to three years. The Korean market had been left out due to less generous shareholder benefits and dividends, a dearth of innovations and poor corporate performance. The government’s promise of structural reforms was nothing more than rhetoric, while financial companies were busier pocketing commissions than tending to profits for customers.

Because the stock market attracted little attention, Korean shares became some of the cheapest. The price-to-book ratio (PBR) - calculated by dividing the current closing price of the stock by the latest quarter’s book value per share - of the Korean stock market stands at 1.0 times the market value. In other words, share prices are about at the level of what would be left of a listed company that goes bankrupt. The average PBR of global markets is 2.0 times. Only the markets of financially troubled Russia and Greece are more undervalued than Korea’s. The price-earnings ratio of Korea, which is its market price per share divided by annual earnings per share is at 10 times, well below the global median of 15 times. Korean shares are, in fact, pitiful.

Foreign investors have moved into the local bourse to sweep up bargains. The general belief is that the Korean economy won’t likely do great in the future, nor will it be a train wreck. Companies like Samsung Electronics are showing signs of improvement. Corporate earnings are expected to improve this year thanks to low oil prices and a weaker won. Companies also promised to return more dividends to shareholders.

The Korean Composite Stock Price Index has room to gain 5 percent to 10 percent more, given how much it had been undervalued. It could head higher if corporate earnings beat expectations. But just because the market is bullish, it doesn’t necessarily mean that investors can make easy money. You could lose big if you jump in on others’ success stories and marketing enticement from financial companies. Individual investors must do their homework and seek leverage in risk-taking.

Stock investment is no different from shopping. If you decide to buy a bag or watch, you would compare items, prices and look up buyers’ reviews. The same discretion should apply to stock or fund purchases. You need to study what kind of good products companies make and how well they do, as well as the capabilities of the managing executives and how much the companies pay in dividends. Once you make a purchase, you should avoid checking the prices every day. Instead, consider yourself a part of the company.

If you’re not that confident about making a direct investment, you could opt for funds instead. This, too, is not that difficult. First you read the investment portfolio, which shows what the fund invests in and why. You choose a fund that looks most reliable. If you spread out investment in various funds in local and overseas markets, your investment could be more secure.

Lastly, there is a word of advice - or plea - for financial institutions and government. We beseech them to do their best to keep the recovery momentum alive. Financial institutions should place the interests of customers first. They too can profit if they have more long-term investors. The government should upgrade the investment environment. Much higher taxes are levied on stock funds than savings and insurance products of similar investment structures. Stock transaction fees paid to the market are more than double than those charged by securities companies. The stock investment tax should be rationalized. A healthier capital market could lead to growth in the middle class.

JoongAng Ilbo, April 16, Page 28

*The author is the head of the JoongAng Ilbo Sisa Media.

by Kim Kwang-ki