Foreign Sell-Off Pulls Down Seoul Bourse

By Yoon Ja-young
Staff Reporter

Foreign investors, who led the rally on the Seoul bourse until early this year, are now pulling the index down as they dump financial stocks at a brisk pace.

The sell off follows the announcement of U.S. President Barack Obama's plan to limit the size and activities of commercial banks.

Prudential Asset Management said Obama's proposal could deal a blow to U.S. financial businesses.

If it gets approval by Congress in its current form, it would block commercial banks from engaging in private equity or hedge fund businesses, which would impact on the M&A and financial markets.

``This would work negatively on the stock market,'' Prudential concluded, adding that it would be like the resurrection of the Glass-Steagall Act that was abolished in 1999.

Obama is proposing banning commercial banks from proprietary trading, or making investments on their own behalf, on the determination that such risky activities triggered the global financial crisis that ended up burdening taxpayers.

Banks on Wall Street suffered around a 10-percent drop in their stock prices upon Obama's announcement, while financial stocks in Seoul also couldn't avoid the negative effects.

Switching to Safety Assets

Park Ga-young, an analyst at Korea Investment & Securities, said that investors are switching to safety assets due to the strengthening of regulations on speculative investment.

``The first sign of a preference for safety assets is the exodus of foreign investors,'' she said, adding that the phenomenon is not limited to Korea. Investors are deserting most major emerging countries that have been categorized as ``risky.''

Adding to the worries is China, which is hurrying to tighten credit. ``Consumer prices rose over 3 percent from a year ago on heavy snow and rising resource prices. This is the reason for the tightening,'' Park added.

``When realized, the measure will decrease hedge fund investments, which will lower the preference for risky assets following an economic recovery,'' said Cho Sung-joon, an economist at Meritz Securities. He said the dollar carry trade could end upon the fall in hedge fund investment coupled with China's tightening policy, meaning emerging markets will likely falter.

Positive Outlook for Longer Term

The Obama plan to regulate banks could be bitter but effective medicine for the longer term, according to analysts. Prudential Asset Management said in a report that banning commercial banks from doing investment bank business seems like a positive move to stabilize the economy.

Meritz Securities' Cho was skeptical over whether Obama's proposal will be approved by Congress. ``If the stock market continues to plunge, people will turn their backs on Obama. Republicans, who are conservative when it comes to regulation of banks, recently secured 41 seats in Senate, which means they are likely to block the bill.''

He added that it would also take a few years for full implementation.

On the positive side, he said that the recent weakening of the Korean won after the U.S. President's announcement could work positively for exports here, amid strong economic growth in China and improving performances by Korean businesses.

``If the stock market continues falling, China, which is turning toward a tightening policy, can delay a key rate hike. Shocks to the financial market would be short lived in that case,'' Cho said.

chizpizza@koreatimes.co.kr