Published June 2000, © 2000 BridgeNews

S. Korea's KSDA chief says stock market relatively undervalued

By Luis Da'Costa, BridgeNews

NEW YORK -- The recent correction in the South Korean stock market should not deter investors from its attractiveness, Chang Mo Bae, chairman of the Korea Securities Dealers Association, said Thursday. In fact, the leading KOSPI composite index is relatively undervalued when compared with other foreign indices, he said.

"If you should compare the market indices of the KOSPI and the Dow for the past decade, our market has not kept the upward pace of the U.S. stock market," he said, in a speech to bankers and investors at a KSDA conference in New York. "This indicates that our stock prices are relatively undervalued."

He noted that South Korea's stock market has undergone a "serious" correction since April, citing a 30% drop in the KOSPI index and a 50% decrease in the Kosdaq, the country's second stock market.

And while stating that the Korean market had not climbed along with the Dow, he noted that increased volatility in the country's stock market is a global phenomenon.

"Korea is not alone in seeing substantial corrections in over-enthusiastic stock markets, particularly for technologies," he said.

Although he declined to provide a forecast for both the KOSPI and KOSDAQ, he was optimistic on the prospects for the country's stock markets going forward.

On the attractive side, corporate profitability has soared to record levels in the first quarter of this year with listed firms posting combined net profits close to $14.5 billion, he said. He pointed to Samsung Electronics, which netted $1.42 billion and Posco's $1.56 billion in profits.

LIQUIDITY FUND TO RELIEVE BOND MARKET

On the fixed-income side, the KSDA chief said that the bond market had been shrinking this year because of the relentless redemptions of insolvent Daewoo bonds by investment trust companies.

He added that the shrinkage "was caused mainly by the systemic weakness, with 80% of demand dependent on ITCs and banks."

However, he said that the creation of a 10-trillion-won bond fund should inject much-needed liquidity into the corporate bond market.

Korea's bond market, which was previously "all buyers, no sellers, shifted dramatically in the summer of 1999 to all sellers, no buyers," he noted. This created a corporate bond liquidity crunch, which the bond fund aims to alleviate, he said.

IMPROVING MARKET INFRASTRUCTURE

The KSDA chairman stressed government efforts to continue pursuing improved market infrastructure to provide a more sound securities trading environment, citing the recent launch of the nation's third stock market: the over-the-counter BB (broker-to-broker) market.

In addition, the Korean Stock Exchange (KSE) and the KOSDAQ would be strengthened further to improve the quality and security of trading systems, he said. Foreign companies may be allowed to list their shares on the exchange.

Regarding deals with other global stock markets such as the U.S. NASDAQ, he said: "We are not looking to form strategic alliances with other stock markets until we have a well-developed local stock market first."

On bond market infrastructure, the KSDA chief said that the July 1 introduction of the Market-To-Market valuation system will be "a big step towards increasing market liquidity by increasing the transparency of bond prices and reducing barriers to active portfolio trading."

Among the initiatives South Korea is pursuing to revitalize the country's financial markets are to further increase liquidity and raise the efficiency of the secondary market, to establish a consistent government bond auction and the extension of the benchmark yield curve.

"These improvements, along with the primary dealer system implemented in July 1999, should soon bring Korea's debt markets in line with international standards," he said.