Market Insight: Korea’s Kospi hits 5-year high

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South Korea’s retail investors, encouraged by increasing signs of a stronger domestic economy, have returned to the stock market, helping boost the Kospi benchmark stock index to a five-year high this week.

Increasing fund inflows from domestic investors have made the market one of the best performers in Asia this year, pushing the Kospi 12.5 per cent higher to 1,010.92, above the psychological barrier of 1,000 points.

This is a clear change from last year, when retail investors burned by failed investments during the 1997-98 financial crisis opted to stay away from the volatile stock market.

“Retail investors are returning to the market as the domestic economy is set to recover and corporate earnings are expected to increase,” says Hwang Chang-joong, an analyst at LG Investment & Securities. Individual investors’ average daily turnover has risen 18 per cent to Won2,600bn this year, as they become more bullish on Korean stocks, shrugging off negative factors such as higher oil prices, the stronger won and North Korea’s nuclear crisis.

In past stock market booms, individual investors have preferred to make their own bets; this time they are expanding indirect investments through equity-linked funds offered by asset managers. “Most retail investors have failed to make money through direct investments. Due to bad track records, they are now turning to professional asset managers,” says Oh Sung-shik, a fund manager at Franklin Templeton Investments.

Financial firms are offering a variety of investment products to lure investors seeking higher yields. Returns elsewhere are meagre, with interest rates falling to a record low of 3.25 per cent and the property market remaining sluggish.

Regular savings funds into which investors put a certain amount of money every month have become a mega-hit in South Korea, changing people’s perception towards stock investments and reducing market volatility. “These funds made people realise that they can invest in stocks with small savings. The steady inflows helped stabilise the market, reducing people’s wariness over stock investments, which were deemed risky,” says Song Seong-yeop, a fund manager at PCA Investment Trust Management.

Morgan Stanley said regular savings funds were a “long-term blessing” for the Korean stock market and should help lead to a rerating of Korea. South Korean shares are undervalued significantly due to investor concerns about geopolitical risks and corporate governance. They currently trade at only 7.3 times expected earnings per share, well below Hong Kong’s 14.5 and Japan’s 16.5.

Fidelity Investments, the world’s largest asset manager, said South Korea had the potential to become the single largest mutual fund market in Asia outside Japan, citing high savings rates, strong demand for mutual funds and increasing domestic liquidity.

South Korea’s mutual fund market, which grew 30 per cent last year to $191.5bn, is expected to see steady growth in coming years as national pension funds are allowed to invest in stocks. In addition, corporate pension funds are to be introduced at the end of this year.

Terence Lim at Goldman Sachs believes that the growing popularity of regular savings funds will help promote long-term investments in South Korea, increasing resilience to downward pressure.

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