By Kim Da-ye
When European Central Bank (ECB) President Mario Draghi promised on July 26 to do everything necessary to save the euro, money started flowing into the Korean equity market.
The massive amount of capital inflow is rooted largely in investors’ expectation on tangible solutions for the debt crisis in the eurozone and on the third round of quantitative easing by the U.S., analysts say.
That means when the expectation fades away, the money could ebb away along. Now may not be the time to celebrate foreigner investors’ return but the time for caution.
Since July 27, foreign investors net-bought Korean shares for 14 days except one day on Aug. 3.
The scale of the buying spree is massive. On Aug. 9, they net-bought stocks worth 1.56 trillion won, lifting the benchmark index KOSPI by 1.96 percent or 37.36 points.
Cho Yun-nam, the research center head of Daishin Securities, forecasts that foreigners are likely to keep buying Korean shares for up to a month until the European and U.S. governments come up with specific initiatives for the eurozone.
On Aug. 31, investors’ attention will be focused on Federal Reserve Chairman Ben Bernanke’s words at the annual economic policy symposium held in Jackson Hole, Wyoming. On Sept. 6, the ECB will make a key rate decision, and a week later, its American counterpart will outline the latest monetary policy.
Cho said that investors’ expectation is likely to be met with desired actions but what matters more is when they would be taken.
“Foreign investors have good intelligence capabilities. If they weren’t sure the government would take necessary action, they wouldn’t have bought at such massive scale,” Cho said.
Empty rally
The recent rally, without apparent improvements of the market’s fundamentals, is ironic. On Wednesday, the U.S. retail sales for July came out better than expected, growing 0.8 percent from the previous month. It’s a good sign for those hoping for the recovery of the world’s largest economy but a disappointment for those hoping for the third round of quantitative easing.
Since Draghi’s commitment, more money was pumped into Korea than any other emerging markets in Asia excluding China.
According to data provided by Credit Suisse, foreigners net-bought Korean equities worth $2.95 billion during the first 10 days of August, which is more than half the foreign capital that moved into emerging Asian economies except China and Malaysia.
The preference for Korean securities may have little to do with the country’s fundamentals. Because the Seoul bourse lost the most during the height of the crisis, it is now gaining back the most.
“Korea traditionally does well when its discount is bigger than its historical average,” Sakthi Siva, a Credit Suisse analyst, wrote in a recent report.
Foreign investors have been distinctly picky in choosing stocks in the recent rally. Most money poured into Samsung Electronics, Hyundai Motor, Kia Motors and Hyundai Mobis.
While those companies have shown outstanding performances in their industries globally, market observers say that foreigners’ appetites for them have little to do with that.
A large portion of the foreign net-buying is done through computerized trading. Foreigners’ net-buying through “program trading” hit a record high at 1.68 trillion won on Aug. 9 — much higher than the previous record of 1.42 trillion won set on Sept. 18, 2009.
Furthermore, arbitrage — trading similar assets simultaneously to profit from mispricing in the market — accounts for a large portion of computerized trading. For arbitrage, companies’ market cap may matter to the investors but not their quality.
While foreign investors hoarded Korean shares, individuals went on a selling spree. This time, institutional investors are walking an independent path — it has bought more than it sold since July 27 but in somewhat timid manner.
It’s typical of individuals to sell their shares when the market improves. Retail investors as a whole tend to buy stocks at high prices, see their values drop and sell as soon as they begin recovering.
With the rally being expected to be short-lived, retail investors are left with few choices — making the most out of the brief affair or wait for an actual recovery.
Han Beom-ho, an analyst at Shinhan Investment & Securities, recommends investors to not sell their equities but refrain from aggressively copying foreigners’ buying patterns.
“Even for the investors capable of reacting with speed, I recommend keeping the time gap between profit-taking and buying new shares tight,” Han said.
A majority of analysts agree that the liquidity-driven market would cool down soon and investors would begin paying more attention to fundamentals.
“The rally based on expectation has progressed to a certain extent. Now the market would look into fundamentals, but we aren’t yet confident about them,” Yoo Joo-hyung, an analyst of Korea Investment & Securities, said.