[ed] Uneasy stock market rally

The Seoul stock market is continuing its brisk rally. The benchmark KOSPI broke through 2,100 Tuesday for the first time since August 2011, and the upward trend continued Wednesday and Thursday. Speculation is prematurely rife that the main stock index might surge above the record high of 2,228 set in May 2011.

There are plausible reasons for the bullish stock market.

First and foremost, foreign investors have been spearheading the recent rally thanks to ample global liquidity as central banks in major countries have eased their monetary policies through quantitative easing and interest rate cuts. In Seoul, foreigners were a net buyer of stocks worth 12 trillion won in February, compared with a net selling of about 1 trillion won in January, and the net buying swelled to 29 trillion won in March.

More recently, there are expectations that the US Federal Reserve will delay its interest rate hike, which has accelerated the inflow of funds into emerging markets in Asia, including Korea

The Seoul bourse also has been underestimated while stock markets in the United States, Europe, Japan and China have rallied in recent months. Japan’s Nikkei 225 index, for example, has jumped nearly 100 percent in the past three years, boosted by Abenomics, which helped improve Japan’s corporate competitiveness significantly.

The prospect that Korean companies’ results will improve thanks to lower oil prices and lower interest rates provides fodder for upbeat stock market forecasts. It’s obvious that the latest stock market rally will have a positive impact on the economy, especially on domestic demand.

The problem is that the Seoul bourse may be overheating amid signs of bubbles, raising fears that retail investors might suffer huge losses later At a time when it’s increasingly difficult to find proper investment targets due to lowest-ever interest rates, there are clearer signs that retail investors have opted for stock investment. The share of retail investors in stock transactions rose from 50 percent at the end of March to nearly 60 percent recently. Customer deposits at brokerage houses also have neared the record high of 20 trillion won.

Most worrisome is that the stock rally could be short-lived unless it is bolstered by improvements in economic fundamentals. In fact, the Bank of Korea has lowered its growth forecast for the Korean economy to 31 percent, and most think thanks predict a continuation of the low growth. What’s more, China’s economic growth fell to a six-year low in the January-March quarter

All this explains why individual investors should be more prudent in investment decisions, thinking about the possibility of a sudden broad-based plunge. The financial regulator also needs to closely watch the stock market so that it can issue warnings on time.

SOURCE: The Korea Times

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