Korean money looking for a home

A recent report by the Bank of Korea should make very interesting reading for Korean companies looking for cash. According to the report there is Wn220 trillion ($197 billion) of idle money in the Korean financial system which is going to be looking for new investment opportunities in the next six months.

This money is classified idle because it is locked up in deposit accounts with maturities of less than six months, or it is placed in investment trusts whose government guarantees are set to expire shortly.

According to the central bank, investors are going to be seeking higher-yielding sources of investment for this money. Last month for instance, bank deposits declined while investments in investment trusts rose for the first time since the problems at the investment trusts surfaced last year with the collapse of the Daewoo Group. Furthermore, government measures such as the reduction of deposit guarantees, a new global financial income tax and lowering interest rates should force this money out into the open.

Where will it go?

What makes this interesting is that most of the large Korean companies that are seeking equity financing have stated that they want to go to the international capital markets through depositary receipt issuance (see table below), rather than tap the local markets for any more money. Many have stated that they would prefer having the stability of a long term institutional investor to being at the whim of the short-term retail investors - even if this means having to sell their equity at a discount and embark on long, costly road shows. Anything to avoid being subjected to the volatile mood-swings of the army of Korean day traders.

This perhaps explains why of all the stock markets in Asia, Korea is most heavily owned by foreigners. By some analysis, more than 50% of the Korean market capitalization is now owned by foreign shareholders. It is just that Korea's largest companies would rather have the stability of long term institutional investors, to the instability of the short-term retail investors.

But foreign investors have continued worries about Hyundai's restructuring, the still-massive chaebol debt overhang and weakness in the Korean financial system. These concerns could cause foreign investors to baulk at any more involvement in the Korean market. That being so, Korea's corporate titans, might be forced to go back to their own people for their funding needs.

All this bodes well for Korea's dynamic second tier companies and tech enterprises. According to bankers in the country, there is a very strong pipeline of IPOs and equity financings waiting to list on Kosdaq and the Korea Stock Exchange. According to the government figures there should be no shortage of money to support the deals - as long as the second tier companies are not crowded out by their larger cousins.