There were solid reasons behind 2006’s market correction, which was a legacy of the super bull market of the previous year, when the Kospi climbed 53.9 per cent. Despite relatively firm export growth in 2006, the domestic economy continued to be weak, which caused GDP growth to slow. The won appreciated considerably against the dollar and yen, putting more pressure on the bottom line of corporate Korea.
Over the past few years, domestic institutional investors’ power has strengthened on the back of continued inflow of funds from individuals. Particularly, instalment fund accounts have shown sharp growth. However, the foreign investors’ role in the market still remains decisive, given that they represented 26 per cent of trading value in 2006 and the focus of their trading weighed heavily on the index. Foreign investors dumped their holdings in 2006 in anticipation of falling earnings. For the first 11 months of 2006, their net sell-offs were 12,600bn won (€10.4bn), three times their sell-off of stocks worth 4220bn won in 2005. As at the end of 2006, foreign ownership of the local market was 34 per cent. Whether foreign investors will come back to the Korean market in force will be a key indicator of market movement in 2007.
We believe the prospects for 2007 look much brighter, as the Korean stock market looks set to rise on the back of strong economic growth prospects. The pace of the won’s appreciation is likely to slow in 2007 and we expect a recovery in the domestic economy. The consensus is that the economy will touch bottom in 1Q 07 and recover gradually thereafter. GDP growth for 2007 is anticipated to post 4.5 per cent, lower than the expected 5.0 per cent in 2006. However, 2007, will show positive growth, quarter by quarter. The presidential election is due in December 2007 and boosting measures to the economy are expected.
The flat performance in 2006 has left the valuation of Korean stocks far lower than those of its peers in the region and this has created a compelling investment opportunity. The consensus of research companies is that earnings per share (EPS) growth of listed companies for 2007 will be about 15 per cent year on year, far higher than those of other Asian emerging markets.
Overall, the outlook for Korea looks positive for 2007 and there are strong grounds for believing that it will start to catch up with the stellar performance of other markets in the region.
Kyu Eun Jeong, fund adviser, Atlantis Korea Opportunities Fund.
