In the last year, its been a difficult time for Korean stock markets: whats your perspective on this?
Jungho Kang Last year, the Kosdaq market experienced the worst development, particularly during the last half of the year. There are two main factors that affected the market so seriously. The first one was undoubtedly the global synchronization effect and the second was unfavorable trading conditions, particularly on the Kosdaq market.
After the summer, there were so many unfavourable incidences such as, for example, the Hyundai Group. Kosdaq is still very young and volatile and these negative trades worried our many investors. Because of these factors, the index plummeted to 52 from our March 10 peak of 283.
How is the index looking now?
It has improved pretty well and is now around 82 or 83, so there has been a 60% improvement from the worst period. I think there are good reasons that underlining this. The first is that people arent so worried about the possibility of a second Korean economic crisis and such cases as Hyundai leaving them exposed. Previously, these firms didnt have a clue how to repay their debentures, but the government made a contingency plan to solve this.
Even though the world economic outlook is not high, it has not been as bad as predicted, so Korean investors aren't so worried. Also there are a few good trends for the future.
The government has made a serious commitment to improve Koreas chronic unfair trading practices. Recently, there was a case where a judge made an interesting decision on an investor who had made about W3 billion in profit from fraudulent trading. The court ruled he must pay W5 billion as a penalty. This was a strict comment on window dressing accounting and improper practice. This, I believe, shows a determination to cure those unfair practices in Korea.
Also on April 15, it was announced that over 600 Korean listed companies had commited to pay higher dividends last year. Previously, this used to be around 12%, but during 2000 it was around 20%.
Whats the importance of that?
One problem in Korea is that dividends didnt used to take into account market value. In general the Korean economy over the last two or three decades can be characterized as an economy of quantitative approach rather than qualitative approach.
During and after the crisis, the business approach has shifted towards the qualitative approach. I dont have the exact number, but people are now more concerned about return on investment (ROI) than volume increases.
In the Kosdaq market there are 610 companies and 570 are manufacturing-based or venture companies. In particular, venture companies performance is very strong compared to 1999, with sales volumes up 50%, profits up to 20% and debt ratio lowered to an average of 51%.
Generally speaking these companies are the Kosdaq markets backbone because their financial statements are strong despite a slow economic cycle, so I'm optimistic about the future.
We are starting to see some positive trends, but what can investors learn in light of the past difficulties?
Because of the big gap between the Kosdaq peak and low last year, I believe investors now realize the importance of risk management and are beginning to understand the character of how risky the markets can be. We, and the government, emphasize that the securities market, particularly the Kosdaq market, is high risk, high return, but people only normally see the light side, not the dark side and are over-optimistic about the future of the markets.
In that sense they are becoming more cautious, so overall they are going to go back to the basic investor principles.
In terms of the future, what effect do you think the US slowdown will have on Korea?
Korean investors always look at the Nasdaq index before they make any decision whether to buy or sell and it's an important indicator of what will follow in the Korean market.
However, there are some important differences between the two markets. The Korean economy is still a high growth economy. Even though we have a lot of IT companies, including dot.com companies, they dont make up a lot of the market. Kosdaq is mostly based on manufacturing which is less volatile. Many companies have shown extraordinary growth with high profits, which is different from Nasdaq.
But because a lot of Koreas growth was based on high tech industry and the US is a major market for that, will its recession have a big impact on Korean exports?
That's true to some extent in some sectors such as auto manufacturing, but if you look at others such as the IT sector, many ventures have the upper edge. There is good domestic demand and for some technologies such as mobile phones, there is still substantial growth there.
Is there anything big on the horizon in Koreas equity market?
Before we look ahead, it's better to talk about what has happened in the past 10 or 20 years. I think this a defining moment in this market. During the 90s, Korean stock prices fell by 29%, even though we had seen 11% to 12% GDP growth.
I have explained the previous lack of a qualitative approach and the move now towards better practice. Many company CEO's' performance is being evaluated by stock price, so they have no alternative to following the needs of investors and adopt best practices. This bodes well for the Korean equity market. Personally I think we can compensate for what happened in the last decade by what will happen in the next.
I believe that within 5 years, maybe even three; the Korean market will have very good prospects. By that time the economy will not have to worry about a second crisis the restructuring will be complete, so by the end of 2004-2005 the market will be reborn.
Which sectors do you believe will see the best performance?
Definitely the IT sector, of that I have no doubt. I can say that because global minded people lead many of those companies some were educated or have worked in the US. They have the technological and marketing skills to do well.
As for Kosdaq, what are you doing to boost your own performance?
When I started, there were only 24 members including management and we are now 80. Also, our computer capacity has increased and systems been improved. Almost 30% of our staff have Masters degrees, so they are very capable and ready to meet new challenges.
Korean investors are now fully aware that Kosdaq is important to the future of the Korean economy. I personally believe Kosdaqs future is Koreas future.