Should We Watch the Kospi Show? [WSJ]
October 6, 2005; Page C1
What with hurricanes, high energy prices and the prospect of an inflation-phobic Federal Reserve pushing interest rates up to gimme levels, many investors are worried that U.S. profits are in for a cooling period.
But one profit signal is still flashing buy: The Korea Composite Stock Price Index has been ticking off new highs. Better known as the Kospi, the index's 37% gain this year makes it one of the world's top performing stock-market proxies.
The Kospi has long been viewed as an indicator of where profits are headed. Since many South Korean companies are export-oriented, their businesses are heavily dependent on world economic growth. Merrill Lynch strategist Richard Bernstein also has noted that Korean companies also are carrying high debt loads. Because corporate credit risks are closely related to corporate profits growth, Korean stocks are sensitive to even slight changes in profits expectation. That is one reason why year-over-year changes in the Kospi have generally jibed with earnings growth at U.S. companies over the past 20 years.
But in this instance, the Kospi mightn't be as good an indicator as usual, says Carlos Asilis, a portfolio manager with hedge fund Vega Plus Capital Partners.
Mr. Asilis thinks that, thanks in part to a credit-card scandal that hit South Korea's banks in early 2003, the Korean stock market became cheap relative to its peers around the world. At least some of the past year's rally may amount to a correction of that valuation disparity rather than anything new. Another factor which may have little to do with the global economy: The market also has drawn money from local investors who have switched into stocks as Korea's government has moved to stifle real-estate speculation.
And then there is the China syndrome. Korea's trade surplus with China came to about $20 billion last year, according to the Korean International Trade Association. That is more than four times what it was five years ago. China now represents about 20% of Korea's total trade.
So, how the Kospi is doing may say more about how China is faring than how the world is doing.
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