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(News Focus) Post-Brexit market under greater sway by foreign investors

2016/07/01 11:35

By Choi Kyong-ae

SEOUL, July 1 (Yonhap) -- It's always hard to predict how the stock market will unfold in the future, and when a catastrophic event hits the market, it is even tougher for investors to gauge its impact and the market's future direction.

While the global financial market remains extremely unpredictable in the wake of Britain's unexpected vote to exit the European Union last week, some investors expect the local stock market to recoup Brexit-triggered losses any time now, seeing the current market turmoil as an opportunity to buy on dips, as was proven in the past few days.

After shedding 3.38 percent from 1,992.58 points for the two sessions through Friday when Britain's EU exit decision was officially announced, the KOSPI has recovered some of the loss this week to close at 1,970.35 points on Thursday.

Analysts' views, however, seems to boil down to the one obvious conclusion -- foreign investors may pull out of the Korean stock market in the long-haul as part of their portfolio relocation strategy to reduce risky assets, and their sway over the local stock market will be greater than before, although their exit pace may hinge on the Federal Reserve's much-awaited rate hikes and key political events such as the U.S. presidential election.

Since Britain's EU exit vote, about US$4 trillion has been wiped off the global equity market. In particular, capital outflow from the high-risk, high-return emerging markets, including South Korea, remains a major concern for global investors.

In this photo taken on June 27, 2016, an employee at Korea Gold Exchange shows 1,000-gram gold bars which sell at more than 50 million won per bar helped by investors' rush to safe assets after Britain's EU exit vote last week. (Yonhap)  In this photo taken on June 27, 2016, an employee at Korea Gold Exchange shows 1,000-gram gold bars which sell at more than 50 million won per bar helped by investors' rush to safe assets after Britain's EU exit vote last week. (Yonhap)

Foreign sell-off will accelerate if Brexit-ignited uncertainties continue to weigh on the markets, and foreign investors may be further tempted to sell risky assets as it will take more than two years for the U.K. to completely bow out from the EU and there are some legal and other obstacles to be tackled, according to market analysts.

"As Brexit might open the door for other economies (in the EU) to consider a similar path to the U.K., Brexit is not a removal of uncertainties but a trigger for bigger uncertainties. Risk appetite of the markets would meaningfully decrease, which would not be positive for the KOSPI," Macquarie Research analyst Chan Hwang said.

Standard Chartered Bank Korea's research team also said risky Asian assets will come under selling pressure in coming months due to Brexit-related worries.

"What is adding woes to Asian markets is that Britain and other European countries will report a slower growth this year. As a result, they will have to decrease their investments in Asian and other global assets," Katheleen B. Oh, an economist at the British bank's research team, said.

In this photo taken in dealing room of KEB Hana Bank in central Seoul on June 24, 2016, currency dealers panic as the markets plunge following Britain's EU exit decision on the same day. (Yonhap) In this photo taken in dealing room of KEB Hana Bank in central Seoul on June 24, 2016, currency dealers panic as the markets plunge following Britain's EU exit decision on the same day. (Yonhap)

Analysts said the KOSPI, South Korea's benchmark stock index, may retreat to the 1,850-point threshold in the third quarter if the markets run wild and a massive capital flight takes place.

Some investors may get a relief from market stabilization measures and economy-boosting steps around the globe which they believe will work to cushion any Brexit fallout to some degree and put a floor under falling stock prices.

Since last week, the European Central Bank and the Bank of Japan have called for a concerted intervention among central banks to pump more funds into the markets should they be needed.

Korea also laid out its own plan by proposing a combined 20 trillion won (about $17 billion) fiscal stimulus package, including a 10 trillion won extra budget, to support Asia's fourth-largest economy, and vowed to take lasting and sweeping measures to tame market volatility.

Korea's Finance Minister Yoo Il-ho also assured investors on Wednesday that Seoul will thoroughly analyze the mid- and long-term impact Brexit will have on trade, foreign exchange and financial markets, and take pre-emptive measures.

This photo taken at the central government complex in Seoul on June 28, 2016, Finance Minister Yoo Il-ho (4th from left) and other economic officials attend a press briefing to announce the government's 20 trillion won fiscal spending plans to support growth in the second half. (Yonhap) This photo taken at the central government complex in Seoul on June 28, 2016, Finance Minister Yoo Il-ho (4th from left) and other economic officials attend a press briefing to announce the government's 20 trillion won fiscal spending plans to support growth in the second half. (Yonhap)

"But the central banks' monetary easing commitments and Seoul's extra spending plan have yet to be carried out," said Mirae Asset Daewoo analyst Ko Seung-hee. "If all the measures prove ineffective in shoring up markets, there will be a massive capital flight from Korea, now more vulnerable to external shocks."

   In Korea, foreigners have offloaded 755 billion won worth of local stocks to move their assets to safe assets such as gold, the dollar and the yen since Friday when Britons opted to withdraw from the 28-nation single biggest economic bloc in a referendum.

At the end of May, Britain invested 36.5 trillion won in Korean equities, accounting for 2.4 percent of the country's total market capitalization valued at 1,497.5 trillion won. It ranked second following the U.S. with 172.8 trillion won, according to data from the Financial Supervisory Service.

The market capitalization fell to 1,458 trillion won on Thursday, with foreign ownership at 26.69 percent down from 29.68 percent at the start of this year, the data showed.

This graphic image shows a pile of bank notes and red line graphs that represents ups and downs of local stocks. (Yonhap) This graphic image shows a pile of bank notes and red line graphs that represents ups and downs of local stocks. (Yonhap)

Citing Seoul's stimulus package, Oh at Standard Chartered said it will "only temporarily" buoy investor sentiment because the size of the extra budget is not enough to create jobs and support regions that will be hurt by ongoing corporate restructuring.

Korea now faces more headwinds than ever: ever-falling exports since January last year, snowballing household debts amid historically-low borrowing costs, restructuring of core shipping and shipbuilding industries which have long been growth engine for the export-oriented country.

Korea's economy is widely expected to grow by around 2.5 percent this year, decelerating from last year's 2.6 percent expansion and the previous year's 3.3 percent growth.

On Wednesday, the government lowered its own outlook from 3.1 percent to 2.8 percent which is still regarded too optimistic among investors and analysts. Its key rate stands at an all-time low of 1.25 percent.

Analysts, meanwhile, says Britain's divorce from the EU will have a limited impact on Korea's real-sector economy given the relatively small trade volume between Britain and Korea.

In 2015, Korean shipments to the Britain accounted for less than 4 percent of its total exports and Korean investments in the European country only amounted to 1 percent of its overall foreign direct investments, Standard Chartered Bank said.

A screen at the Korea Exchange in Seoul shows a sharp plunge in the British Pound against the U.S. dollar on June 24, 2016, when financial markets were rocked by Britain's unprecedented vote to leave the EU. (Yonhap file photo) A screen at the Korea Exchange in Seoul shows a sharp plunge in the British Pound against the U.S. dollar on June 24, 2016, when financial markets were rocked by Britain's unprecedented vote to leave the EU. (Yonhap file photo)

Currency analysts said the Korean won may weaken to 1,240 won against the U.S. dollar amid Brexit woes in the second half from the average of 1,182 won in the first half.

"But we don't expect any sharp plunges in the won's value in the second half as the Federal Reserve won't likely lift borrowing costs this year and governments outlined their market intervention plans to soothe consumer sentiment," Samsung Futures currency analyst Jeon Seung-ji said.

kyongae.choi@yna.co.kr

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