Wednesday, August 08, 2007

Wall Street

"October: This is one of the particularly dangerous months to invest in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February." - Mark Twain

It's been clear for some time now that the dreaded bank-based investment fund account is seeping further into popular consciousness as the months progress and the Korean stockmarket tracking index, the KOSPI, makes one new high after another. At the beginning of March, the KOSPI stood at 1,400 and by mid-July it had reached 2,000 - an unbelievable 42.8% increase in four months. History teaches us that such rises are rarely sustainable in mature markets.

We have a saying back home that when taxi drivers start giving you stock tips the market's reached its peak. Well, of late you can walk down the street and hear people discussing some double-digit gain their fund account made them in the last month, and there's fairly constant chatter on the social network about the money being accumulated. The other day, KBS ran a fifteen minute report after their regular news programme, following the lives of private stock market traders, some of whom claimed gains in the thousands of percent over the last few years (although it's a truism in trading that the less you start with, the easier it is to make huge gains in percentage terms which might not be so impressive in absolute value). A school was teaching teenagers regular stock market classes and they were running their own portfolios although ironically in such an Internet-centred society, they seemed to be selecting their picks from a newspaper.

It wasn't all happy experiences. A woman who had lost her family's entire life savings and retirement fund in the market a few years ago was interviewed. It seemed she tried to put it behind her but the money her friends were making had recently sucked her back into trading. That's another thing which happens at the top of markets - everyone gets sucked in - even the ones who have been burned before. But perhaps the most alarming thing about her story was that her husband still didn't know any of this years later, and presumably believed their retirement would be financially secure when it fact it was anything but.

I was walking through a park during our recent Seoul trip when we stopped to take photographs on a quiet path near the park wall, near two women who looked to be in their very early twenties. They were discussing the performance of their funds and how much more they might commit to them because of their excellent performance. I returned from Seoul thinking I should short-sell the KOSPI, basically betting on it going down, but in the end it looked like more trouble than it was worth and I stuck to short-selling the Dow instead.

Even though what's been happening in Korea reminds me of the madness of the late dot-com bubble, to quote John Meynard Keynes, "The market can stay irrational longer than you can stay solvent" so who knew how far Korea's markets might ascend? After all, China's rise has been even more meteoric but then that's a different story. It turned out the answer was 'not long', because with fears of a global credit crunch gathering momentum the short-term outlook for global markets looks uncertain, to put it generously.

The latest fears will eventually pass because they always do, but while there may be some pain elsewhere I cannot help but wonder if the effects might be more profound in Korea, because the returns the 'funds' have been making suggest they have a highly leveraged and bullish bias. If there's a sustained downturn maybe they can switch to a bearish stance and make money on the way down, but I suspect this isn't really what they do.

Recently our bank became sufficiently concerned about customers panicking and rushing to their branches to close their funds that they imposed a 24-hour notice requirement for withdrawals, but it's not clear whether the recent downturn has really seeped into the popular psyche, even if there's been extensive coverage on the news. At the very least, it seems the Korean private traders - who they call 'ants' here by the way - dealing directly in stocks rather than throwing their money at fund managers have been having a torrid time - these are figures from KBS detailing the profit and loss on positions (on the top 30 Korean stocks) in the market opened between July 26th and August 2nd:

TypeProfit on positions openedProfit on short positions opened
Korean Ants-11.32%-2.82%
Korean Institutions-1.15%10.36%

So it looks as though the Korean Ants have been taking the latest downturn as a buying opportunity and paying the price for their error. The outcome for Korea's army of individual fund investors remains to be seen.

Korean tags: , 주식, 시장, 은행, 펀드


Anonymous said...

What do you think of the Korean economy as a whole? Is it still dependant on exports or is there a growing domestic market?

Mike said...

I suspect Korea still has a strong reliance on exports, the chaebols being what they are. I'm sure there must be some official figures somewhere on the web which I might have a dig around for sometime when it's not one o'clock in the morning.

Anecdotally, the domestic market seems to be forging ahead and there's a sense that people are getting better off. My recollection is that Korea's still working it's way up the GDP league. The recent Free Trade Agreement with the US will likely change some of the variables if it isn't sunk beforehand. This is relevant:

WSJ link

Actually, there's an unbelievable amount of commercial activity here and I still can't work out how a country this size can support just so much retail space...

Anonymous said...

Thanks for the response. I came across your blog because I was a PCV in Korea back in the day and so i read a number of Korea related blogs. It also happens that I am retired and spend an inordinate amount of time managing my meagre savings..thats what I live on till i reach 65.

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