Since the end of June 2005, the main index of the nation's stock market has surpassed the 1,000 point mark and the Korea Composite Stock Price Index (KOSPI) reached the record high of 1,464.7 on May 11, 2006. After that, as foreign investors' selling spree has continued, the stock market has undergone a correction phase. After mid-November, however, supported by the US stock market's upward movement, the benchmark stock index recovered the 1,400 point mark. Despite a number of bearish factors, such as strong local currency and concerns over possible economic slowdown, the domestic stock market entered a recovery phase again. This is due to North Korea's declaration to return to the six-party talks -- relieving concerns of geopolitical risk -- and investors expect corporate performance to improve due to declining oil prices. The fact that the Korean firms' stocks have been undervalued also seemed to have become a factor of the bullish stock market.
However, unstable factors surrounding the current domestic stock market still exist. First of all, net selling of foreign investors which accounts for 37.5 percent of the domestic stock market as of October 2006 still continues. Foreigners, whose net buying reached 11 trillion won in 2004 and whose net selling reached 3.6 trillion won in 2005, sold shares worth 12.5 trillion won until November 22, 2006. It is assumed that one of the reasons why the domestic stock market has undergone a correction phase since May 2006 is foreign investors' net selling exerted a significant influence. It should also be considered that circumstances could limit the bullish run in the future. These could include self-generating circumstances such as concerns of a possible economic slowdown at home and abroad.
Moreover, the current account which has influenced increased liquidity when the domestic stock market was booming is not positive. The current account surplus which has been maintained since 1998 posted a US$80 million deficit during the first three quarters of this year.
Just as in 2005, external factors are expected to greatly affect the future share market, but in general, the market will likely maintain stability. Above all, the domestic stock market is still undervalued compared to important foreign countries and domestic institutional investors will still be selling the stocks due to the inflow of investment from pensions. According to the Ministry of Planning and Budget, the three pension funds -- the National Pension Fund, Government Employees Pension Fund and Korea Teachers Pension Fund -- will be allowed to increase their maximum limits for stock investments 2.6 times next year from the current level. Such a measure is meaningful in that it will expand the institutional players' roles in the local exchanges. Next, the local stock market is undervalued compared with overseas markets; therefore, it still has strength to show an upward curve. As of the end of October, 2006, the Price Earnings Ratio (PER) of the local stock market based on KOSPI 200 was 10.6, lower than 21.66 of the US, 12.88 of England and 14.00 of Taiwan. If the domestic and overseas economic conditions rapidly get worse, it is highly probable that the local market will undergo another correction phase.
