‘Boxpi’ unlikely to break loose

Finance

Published: 13 Nov. 2015, 21:00

‘Boxpi’ unlikely to break loose

Seoul’s main bourse has been struggling since it fell below the 2,000 mark on Monday, losing nearly 30 points or 1.4 percent from the previous trade.

All week, the Kospi has threatened to sink below the 1,900 barrier but has always closed somewhere in between.

Due to its limited movement, the main market has gained the nickname “Boxpi,” a portmanteau of “boxed in” and Kospi.

But the market shows a few signs of escaping next year, according to the heads of brokerage firms’ research centers surveyed by the JoongAng Ilbo earlier this week.

Many of the country’s leading analysts said the Kospi will likely stay stuck within this limited range.

Although a few projected that the market would likely improve either at the end of the second quarter or sometime in the second half of next year, the general consensus was that the primary market will likely remain lukewarm.

It’s unusual for brokerage firm analysts to be pessimistic since they generate profits when more people invest. Even if they have a negative outlook, their projections for the mid- to long-term are typically positive.

But this time, the situation is different.

The gloomy forecast is largely caused by the United States, the economic health of which has a big impact on the world’s emerging markets.

The large amount of dollars injected into emerging markets due to the quantitative easing since the global crisis of late 2008 could be gradually withdrawn once the U.S. central bank raises the interest rate. When the move comes, which many expect to be announced during the U.S. Federal Reserve’s final meeting of the year in December, emerging markets could see their own currencies and economies heavily shaken.

That impact is dubbed a “taper tantrum.”

Korea is particularly vulnerable. The national economy is heavily dependent on exports and has a huge pool of foreign investors because it is one of the few emerging markets that is highly transparent and open.

“Until the end of the year, a taper tantrum very similar to the one in 2013 dubbed the ‘Bernanke Shock’ will take place,” said Lee Jun-jae, head of the Korea Investment & Securities research center. A Bernanke Shock refers to when a comment by the head of the Fed results in the global stock market tumbling. The opposite is a Bernanke Rally.

In 2013, global markets including Korea fell after then-Federal Reserve Chairman Ben Bernanke hinted in June that the U.S. central bank would likely start reducing its quantitative easing at the end of the year if the U.S. economy continued to grow. He also hinted that the quantitative easing could end by the following year.

“Currently, [Korean] companies are unlikely to see their performance improve as China continues to struggle, and when the U.S. starts its austerity, the stock market will find it difficult to move out of the boxed range,” Lee said.

If the U.S. central bank raises its interest rate, it would be a first since 2004.

“Ten years ago, the global economy was able to grow thanks to the BRIC [Brazil, Russia, China and India] countries,” said Ahn Byung-kook of KDB Daewoo Securities. “This time, the impact on emerging markets will likely be huge.”

In fact, the global economy grew 5.2 percent in 2004, but this year it is expected to grow just 3.1 percent. The economic growth in emerging markets is much worse. Excluding China, emerging markets enjoyed 7.5 percent growth in 2004. This year, they are expected to grow only 3.1 percent.

There are some predictions of stagflation, where the economy continues to struggle while consumer prices rise.

“The 48 percent drop in international crude prices this year compared to a year ago dragged down inflation. But because of this, consumer prices next year could seem as though they are up,” said Lee Chang-mok of NH Investment & Securities. “That will only contribute to expanding anxieties in the market.”

While pessimism prevailed, some were optimistic that the market will eventually pick up.

“Conglomerates like Samsung Electronics have been increasing their dividend payments and increasing the repurchase of their own stocks. Additionally, the government is leading the corporate restructuring [of risky companies],” said Yang Ki-in of Shinhan Investment Corporation. The analyst added that he expects the market to rebound in the second half.

Yang said because corporate profits will be similar to those seen this year, such changes will result in an increase of stock purchases by foreign investors and eventually help the Kospi reach above 2,150.

The market experts pick developed countries as the most lucrative investment region for next year.

While emerging markets will struggle from the taper tantrum, stocks in countries that maintained quantitative easing such as Europe and Japan have room to enjoy additional growth.

However, there was disagreement among the experts on Japan.

“There’s expectation on the policy effect of the weakened yen to the stronger dollar,” said Shin Dong-seok of Samsung Securities.

Yang of Shinhan Investment Corporation disagreed, saying that the depreciated yen will likely come to an end as the yen will be moving in the same direction as the dollar.

“[The Japanese stock market] will likely have trouble rising as much as it did this year,” he said.

Lee Sang-hwa of Hyundai Securities projected that among emerging markets, China will be less affected by the U.S. central bank’s interest hike.

“The investment by foreign investors in China only takes up a small portion, and the effects of the Chinese government’s policies [in stimulating the economy] will slowly show up,” Lee said.

Most of the analysts agreed that a poor investment strategy would be to increase holdings of Korean won as cash in a portfolio.

They cited the low interest rates, and that keeping money in deposits isn’t generally lucrative. They added that the won’s value would fall further if the greenback goes up in value as a result of the U.S. interest rate hike.

“Instead of keeping the Korean won, it would be best to invest in dividend stocks that have a higher profit return rate, or on the U.S. dollar, whose value will likely rise,” said Shin of Samsung Securities.

BY JUNG SUN-EAN, LEE HO-JEONG [lee.hojeong@joongang.co.kr]