Analysts noted the unhindered pace of monetary tightening in the United States, Korea’s sluggish economic growth prospect and an escalating trade war between the US and China bode ill for a momentum for a swift rebound in stock index performance and a turnaround from foreign investor outflow.
|(The Korea Exchange)|
But market giants pared losses earlier this week on institutional buying Friday. Electronics device maker Samsung Electronics remained flat, while chipmaker giant SK hynix rose 3.6 percent.
These came in contrast to a rebound in Wall Street on Thursday. The broad-based S&P 500 rose 1.9 percent, the tech-heavy Nasdaq Composite surged 3 percent, while the Dow Jones industrial average climbed 1.6 percent.
Room for a rebound in the Korean stock market is limited until end-November, due to a lack of events for a breakthrough until the Group of Twenty forum slated on Nov. 29 and robust US economic readings, according to Lee Eun-taek, an analyst at KB Securities.
“Signs of diminishing US-China trade war threat or slowdown in the pace of US rate hike are prerequisites of a palpable rebound in Korean stock market, but both will take some time,” he wrote in a note Friday.
Since undergoing its heyday on anticipation for relieved uncertainties in January, the Korean market has been exposed to heightening global market volatility mainly due to US-China trade war.
Especially in October, Korean markets plunged on growing doubts about US tech stock valuations, leading to their stock price fall. From Oct. 1 through Friday, the Kospi and Kosdaq sank 13.5 percent and 19.4 percent, respectively.
Also throughout October, the foreign capital flight here has worsened in the market, home to tech manufacturer giants like Samsung Electronics and SK hynix. From Oct. 1 through Thursday, offshore investors were net sellers of stocks worth a combined 4.3 trillion won ($3.8 billion) on the Kospi and Kosdaq.
“The widening gap between interest rates in the US and Korea is putting a lid on foreign investor influx, while the US Federal Reserve is expected to carry out another rate hike in December,” Lee Jae-sun, an analyst at KTB Investment & Securities, wrote in a note Friday.
The Korean central bank’s rate hike to narrow the rate gap between the US and Korea -- currently ranging from 50 to 75 basis points -- is one of the keys to detering such foreign outflow. Each gap in policy rate between the US and Korea by 25 basis points is projected to trigger a foreign outflow worth some 8 trillion won from financial markets and a decrease in direct investment by some 7 trillion won, according to a September report by the Korea Economic Research Institute.
But the central bank appears to be at loggerheads, given undermining economic fundamentals. On Thursday, the BOK released a lower-than-expected third-quarter growth of gross domestic product mark, 2 percent on-year and 0.6 percent on-quarter. To achieve the annual 2.7 percent goal that was revised down earlier, the domestic economy growth in the fourth quarter must exceed 0.8 percent on-quarter.
Park Sang-hyun, a chief economist at Leading Investment & Securities, said a Bank of Korea rate hike by the end of this year is unlikely, citing prospects the BOK will miss its growth forecast this year and fears of further foreign capital outflow.
“If a BOK rate hike is put in place in November, with the premise to prevent risks from the US-Korea interest rate gap, it would prompt a depreciation of the local currency,” Park wrote Friday. “More downward pressure on the Korean won against the US greenback will trigger heavier level of foreign outflow.”
By Son Ji-hyoung