Korea on alert for market shocks on Brexit

[THE INVESTOR] The Korean financial market remained volatile on June 27 following the UK’s vote to leave the European Union last week, with the equity market opening with a loss on weakened sentiment.

Brexit is expected to have a long-lasting impact on the global economy with Korean exports to the EU forecast to slow in the coming years, further weighing down investor confidence, hence, Korean President Park Geun-hye has called on her senior secretaries and financial authorities to increase monitoring of the market.

Although Korea’s fundamentals are sound enough to withstand external shocks, the president urged policymakers to remain vigilant and to be prepared with a set of contingencies for further possible shocks.

“Stand by and monitor the markets 24/7, and use any available measures to minimize impacts on our economy to maintain stability,” the president said in a meeting with her senior secretaries on June 27.

“The value of the pound and euro are expected to be volatile, with uncertainties over the global financial market to grow and global trade to weaken further following Brexit, which became a reality while the global economy was already in a state of deterioration,” she added.

The benchmark KOSPI rebounded just before the end of trading on Monday, finishing at 1,926.85, up 0.08 percent on net institutional buying. Foreign investors remained net equity sellers, unloading Seoul stocks worth about 239 billion won ($203 million).

The Korean won continued to lose value, with the won-dollar exchange rising 2.4 won at 1,182 won. The British pound also tumbled to 30-year lows, while the U.S. dollar and Japanese yen remained strong, as well as the value of gold as investors are reallocating their funds to safer assets.

Analysts forecast Korean stocks and won to fall further, with the benchmark index touching as low as 1,800 and the currency potentially depreciating to 1,200-1,300 won.

“We turned relatively skeptical on the outlook of the KOSPI and recommended investors to be selective as we think there has been no major improvements in global supply-demand. Given unexpected negative event, we maintain our relatively cautious view for the market,” Macquarie Research said in an analysis report.

“Given expected shrinkage of global risk appetite, we believe the Korean won would be weakening further against both the U.S. dollar and Japanese yen. Hence, without significant disruptions in end-demand, some exporters -- auto, auto parts and IT companies -- should benefit from weak currency.”

Central banks the world over including the U.S. Federal Reserve, the Bank of Japan and the European Central Bank pledged to provide liquidity in case the global financial system becomes more vulnerable to the turbulent changes following the UK’s EU exit.

President Park called on the country’s financial authorities to strengthen cooperation with global financial institutions, with her top fiscal policymaker reminding the public of Korea’s foreign reserve position and aggressive countermeasures to offset market concerns.

“Korea has over $370 billion in foreign reserves, and has strength to manage external risks,” Finance Minister Yoo Il-ho said in a meeting with officials over the weekend.

“The government will continue to boost its preparedness against a crisis by securing liquidity,” he added.

The Financial Services Commission chairman Lim Jong-ryong also held a meeting with regulators and central bankers on Monday to reevaluate the market, stressing, “We will seek to stabilize the market in phases should concerns rise excessively.”

By Park Hyong-ki (hkp@heraldcorp.com)