Stock market of south korea

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Stock Market in South Korea

Text of Stock market of south korea

  • 1. Stock Market of South Korea Yuvraj Samant National Law University Jodhpur 784

2. South Koreas Stock Market Structure South Koreas equity market is comprised of two segments: 762 stocks listed on the original Korea Stock Exchange (Stock Market Division in the now integrated Korea Exchange), and 982 stocks listed on the original KOSDAQ (now called KOSDAQ Market Division). 3. The Korea Stock Exchange listed issues are traditionally the major focus for foreign investors. Of the 99 stocks currently included in the MSCI South Korea Index, only one trades on the KOSDAQ.YTD performance of the two market segments is strikingly different.While the KOSPI Composite (which tracks all stocks listed on the original Korea Stock Exchange) is flatYTD, the KOSDAQ Composite index is up significantly (Chart 1). Since Korea Stock Exchange listed stocks are the major investment vehicles for foreign investors, the lagging KOSPI causes a lot of international concern. 4. Similar to the S&P 500 index, the KOSPI 200, a popular local market benchmark, tracks the largest 200 companies on the Korea Stock Exchange and accounts for more than 70% of its total market cap. The MSCI South Korea Index, which tracks the higher end of the large cap universe, has only 6 of the 99 companies not already in the KOSPI 200. Combing through the largest 200 companies, some notable traits can be found. 5. One company dominates the index performance Samsung Electronics Co. Ltd., with a market cap exceeding USD 200 billion, is the big fish in a small pond. It accounts for 25% of KOSPI 200 index weight, and more than 30% in the MSCI South Korea Index. The influence of this single company is actually even bigger than the weight percentage indicates, as many of the electronic component suppliers are captive entities under Samsungs corporate umbrella. While the company had a banner year in 2012 (up 55% in USD terms), it is down 3.5% YTD, providing no support to the market. 6. Export-oriented companies dominate the stock universe Many of the largest 200 companies on the Korea Stock Exchange are geared towards the export market. Table 2 lists foreign sales of the five largest companies as a percentage of total sales; all but one exceeds 50%. The low percentage of POSCOs foreign sales is misleading, as its steel products are sold to South Korean auto makers and shipbuilders, whose final products are ultimately sold overseas. POSCO has much more foreign market exposure than 25%, albeit indirectly. This applies to many other South Korean industry suppliers. When an auto parts manufacturer or semiconductor supplier sells to Hyundai or Samsung, they gain overseas exposure through their customers. 7. Non-financial companies in KOSPI 200 can be grouped into five large segments Each group is led by a couple of national champions and followed by a group of suppliers. Electronics:The leading companies are Samsung and LG, as well as a number of components and material suppliers.This segment is a major export powerhouse. Auto Makers: Kia and Hyundai Motor, then a group of auto parts suppliers, steel products manufacturers and material suppliers.This segment sells most of their products overseas. 8. Engineering & Construction: A less noticed export industry in South Korea.Their main export markets are Africa and the Middle East, as well as other Asian countries.The largest company generates 60% of its revenue overseas, while the second largest player has over 80% of its sales from foreign countries. Chemicals: The percentage of export sales varies among companies, but many of them exceed 40%, including the top two players (74% and 64%, respectively). Compared to Japans Chemical industry, most South Korean companies focus on lower value, commodity-type chemicals, but some aspire to expand to the specialty/fine chemicals used in the auto, semiconductor, and clean energy industries, where they compete directly with Japanese peers. 9. Shipping: this segment includes shipbuilding and shipping companies. Shipyards sell mostly to shipping companies based in Korea but since the latter group generates significant business overseas, shipbuilding companies by default are tied to the export market. 10. Whats Keeping The KOSPI Down There are several factors contributing to KOSPIs disappointingYTD performance.We found three major causes, and discuss how our view differs from the consensus. 11. 1. The North Korean threat North Koreas provocative actions have stirred fears among foreign investors. While domestic investors kept buying during and after these incidents, foreign investors have been net sellers of South Korean stocks (one reason KOSPI lags KOSDAQ is foreign selling has largely been in the KOSPI, not the KOSDAQ). Maybe domestic investors have seen it all in the past? When North Korea conducted two rounds of nuclear tests in 2006 and 2009, the KOSPI reacted negatively in ensuing days, but returned double- digit gains six months later. Other hostile incidents in the past also failed to cause too much disruption to the market. 12. Aside from the impact of individual geopolitical incidents, we believe the frequency of such events causes fears among foreign investors. Chart 2 shows the frequency of North Korean provocations since 1999; obviously 2013 has set the record even though the year is not even half over. 13. 2. Sell-off from Vanguard Emerging Market ETF fund In the March Green Book we discussedVanguard changing the tracking index of its popular Emerging Market ETFVWO. In the new index, South Korea is not classified as an Emerging Market country, requiring Vanguard to sell all South Korean holdings from its EM fund. DespiteVanguards promise of a smooth transition, we foundVanguards sale of South Korean names was surprisingly quick.Table 3 shows the top 20Vanguard EM fund sales over the past three months. Of the sales, 19 of the names are South Korean companies. 14. Judging by the speed of the sales and the remaining holdings of the South Korean names in this fund, we think this selling pressure will persist for another three to four months. By the fourth quarter of this year, these companies should see some relief from the heavy selling. All VWOs South Korean holdings are listed on the Korea Stock Exchange (not KOSDAQ), as the fund originally tracked the MSCI South Korea Index. As discussed earlier, the latter index covers 99 stocks, of which 98 are listed on the Korea Stock Exchange. For that reason, the fund rebalance has only impacted KOSPIs performance, but not the KOSDAQs. This is another factor contributing to the YTD performance differentials of the two. 15. 3. Abenomics and the depreciation of the Yen Newly elected Japanese Prime Minister Shinzo Abe made headlines this year with his array of policies proposed to raise inflationary expectations and bring his country out of its prolonged recession. With his call for fiscal expansion and monetary easing, the most noticed consequence internationally is the depreciation of the Yen. Unlike the first two risks to the South Korean equity market, the negative impact of a depreciating Yen is harder to dismiss. 16. Since October 2012, theYen has depreciated more than 20% against the Won. Investors are dumping Korean exporters in fear of losing their competitive edge to Japanese competitors.This fear has proven correct in the past. Since 1999, South Korean companies have largely outgrown their Japanese peers in terms of exports (the readings in the middle panel of Chart 3 stayed positive most of the time), except from 2004-2007 when theYen had a long stretch of depreciation against the Won (upper panel of Chart 3), and from 2001-2002 (due to the bursting of the tech bubble, not the exchange rate). During the 2004-2007 period, Japanese exports caught up to South Koreas, significantly narrowing the growth differentials. However, there are other interpretations of this chart as well. 17. First, despite the narrowing differential with Japan, South Korea grew its exports during 2004-2007 by double digits every quarter. Even though it was losing some edge to Japan, South Korea was gaining market share at the expense of other countries during that period.This is no surprise, judging by Korean companies improving product quality and technological innovations. Second, Japanese exports only started catching up to South Koreas in the second half of the 2004-2007Yen depreciation cycle.This indicates that without a prolonged and sustained trend in exchange rates, its hard for countries with a depreciating currency to gain any advantages, as companies in these countries may be hesitant to cut export prices for more market share, if the direction of exchange rates could reverse. 18. Third, despite the rapid rate ofYen depreciation this time compared to any other period in the past, the South Korean Won to JapaneseYen ratio still stands at an elevated level, merely offsetting the sudden dramatic depreciation of Won during the 2009 crisis. During the 2004-2007 period,Won perYen started around 11, then declined to 7.6.This time, even after theYens quick 20% fall,Won perYen stands at 11 today. Nevertheless, we still cannot be sure that any future currency movement wont affect South Koreas export business.The continued downward movement of theYen, pushing the rate below its long term average, would make us more worried. However, we think this scenario is quite unlikely, as other Asian countries have voiced opposition to theYens recent movement. Even if the exchange rate does change the international competitive landscape, certain areas of South Korean exports should weather the challenge better than others (see next page). A bigger worry is shrinking international trade volume. South Koreas export volume has been weak in the past four quarters (Chart 4), echoing the trend of our Global Trade IndexYOY growth (Chart 5). 19. Is It Time For Bargain