Korean markets join global markets in decline, IPOs canceled

Markets across the board have weakened dramatically as rates in the United States rise, with equity, bonds, currencies and cryptocurrencies hit hard by the rush to quality and weak investor sentiment.

[SHUTTERSTOCK]

Markets across the board have weakened dramatically as rates in the United States rise, with equity, bonds, currencies and cryptocurrencies hit hard by the rush to quality and weak investor sentiment.

This is very much the case in Korea. Not only are the markets being put under strain by hot money outflows and the threat of more, but the local central bank has been tracking the U.S. Federal Reserve and has said that rapid rate increases are not out of the question at home.

Korea, like most countries, faces the dilemma of capital flight versus higher, economy-crushing, rates. The Russia-Ukraine war and production bottlenecks lingering from the pandemic only add to the stress on the markets.

The Kospi hit a one-year low on May 12, and the won is nearing levels not seen since the 2008 global financial crisis. Companies are canceling initial public offerings (IPO) as investors shift to a wait-and-see mode.

On May 4, Federal Reserve Chairman Jerome Powell said that half-point hikes are likely in June and July, though he also said a 75 basis point hike was not currently under consideration. But following the announcement of higher-than-expected inflation in April, Powell said that he can't guarantee a "soft landing" for the economy.

Last month, Bank of Korea Governor Rhee Chang-yong said the household debt "growth rate should be alleviated through interest rate signals," raising investor concern about a hard pull on the rate lever.

When a central bank announces a rate increase, both businesses and consumers tend to cut back on spending, causing earnings to fall and stock prices to drop. The market may tumble in anticipation.

Jay Kim, an analyst at Sangsangin Investment & Securities, lowered his projection for the Kospi to a range of 2,550 to 2,750 points in June and July from the previous 2,600-to-2,800-point range. Kim Yong-ku, a strategist at Samsung Securities, projected the Kospi to recover to 2,800 points by the end of the third quarter, and gradually up to 3,000 points by year end.

Currently, the economy is passing through a phase where it "faces the consequences of the excessive liquidity unleashed" following the Covid-19 outbreak in early 2020, said Kim from Sangsangin. "If the price of blue chip stocks with solid earnings and abundant liquidity start to recover within a month or two, the indexes are likely to start to gradually stabilize."

Stocks The Kospi fell to 2,550.08 points on May 12, down almost 20 percent on year. The May figure was the lowest since November 2020. Kosdaq hit 831.59 points on May 10, down 16 percent on year.

A contributing factor to the sluggish indexes is a major selloff by foreign investors. Korea's stock market is vulnerable to selloffs by foreign investors as they flee to relative safe havens.

Through May 25, foreign investors net sold 15.36 trillion won ($12.13 billion) worth of Korean stocks this year.

Foreign investors own 27.6 percent of Korean stock, the lowest ratio since June 2009, according to the Korea Center for International Finance (KCIF).

The Korea selling spree was the strongest after only Taiwan and Turkey.

"Foreign investors actively sold electronics stocks as concerns about the IT industry rose," according to a KCIF report released on May 11.

In the Korean stock market, electronics, steel, shipbuilding and construction companies are disproportionally represented. They are 49 percent of the local securities market. Profits generated by these companies change rapidly depending on economic cycles, making Korea a less favorable market at times of economic slowdown and high inflation, according to the KCIF.

An electronic display at Hana Bank in central Seoul shows the Kospi and foreign exchange rates after the markets closed on Wednesday. [YONHAP]

Currency exchange

The major selloff by foreign investors resulted in lower demand for the won, which hit 1,291.50 won to the dollar on May 12. It was the first time the currency broke 1,290 won in more than two years.

"The lower won against dollar usually creates a favorable environment for a country's export," said Lee Jeong-hwan, an assistant professor at the College of Economics and Finance at Hanyang University. "But it's not just the won that is depreciating against a dollar, but also other currencies like the Japanese yen and Chinese yuan. So price competitiveness of exports cannot be gained through the recent depreciation of the currency."

A currency swap with the United States would have helped stabilize the won, but none was agreed to during President Joe Biden's visit to Korea, though Kim Tae-hyo, first deputy director of the presidential National Security Office, said "practical discussions" on exchanging currencies are taking place.

Korea signed currency swaps with the United States twice, once in 2008 and another in 2020.

"Korea has an ample amount of the foreign reserves, so a currency swap isn't currently needed at this point," said Lee.

Korea's total foreign reserves as of the end of April were $449.3 billion, down 1.9 percent from March. The country's foreign reserve holdings ranked No. 8 globally as of March.

Central bank governor Rhee has said setting a currency swap with the United States is unlikely.

"Countries that have set a currency swap line with the United States are countries that are globally known as the financial hubs," said Rhee at a parliamentary hearing before his appointment in April. "Korea would not be able to sign a currency swap line when we haven't reached that state."

Korea's most recent swap line with the United States was a $60 billion deal signed in March 2020. It expired in December.

IPO cancellations

With the market weak, IPOs are being cancelled or delayed.

Six companies have withdrawn their plans so far this year.

They are: SK shieldus, SK Square's security subsidiary, One store, Hyundai Engineering, Voronoi, Daemyoung Energy and Tailim Paper.

Volatile markets and poor sentiment led to weak demand from investors, causing the price to be too low, they argued.

Lee Jae-hwan, CEO of One store, an app store operator that is 47.5 percent owned by SK Square, had insisted that "there is no withdrawal plan for the company." But the company ended up withdrawing the plan, citing "the difficulty for the company to be valued properly."

"IPO market size was a record high in 2021," said Cho Chang-min, a research assistant at Yuanta Securities. "The simple reason behind the declining attractiveness of the IPO this year is the sluggish stock prices of newly listed companies."

LG Energy Solution is down more than 30 percent since it was listed in January. The price of Iljin Hysolus, a supplier of hydrogen tanks listed in May last year, is down 60 percent from its peak. Krafton, a game developer, is down around 55 percent from the peak and is currently trading at around half the IPO price.

Some of the highly anticipated IPOs include e-commerce operators Kurly and SSG.com and car-sharing app Socar.

The share price of Kurly is down almost 30 percent from the beginning of the year, according to a Seoul Exchange website where unlisted companies are traded. The price of Oasis, another e-commerce app, is down 18 percent in the same period.

Pulling out from the planned IPO could be risky for some companies that received pre-IPO investment.

Investing in pre-IPO stocks allows investors to buy company shares at what could be a fraction of the market value, giving a higher return for investment. If companies don't go public within a period that was promised, they are usually required to return the investment plus the interest, though every contract varies.

Companies that received pre-IPO investment include Kurly and health and beauty store franchise Olive Young.

"It's difficult to conclude whether the IPO will take place this year or not," said Kim Soo-jin, a spokesperson for Kurly, which received 250 billion won in pre-IPO funds from Anchor Equity Partners.

"We applied for a preliminary qualification examination with the Korea Exchange on March 28. We'll be able to announce the specific IPO plans after we receive the results."

Kim Ha-eun, a spokesperson for SSG.com, said, "Our goal was and still is to go public this year. We are ready to proceed with the IPO, but we also think that we may have to wait until the market improves to receive proper recognition of our corporate value. There is a possibility the IPO may be pushed next year if demand for investment continuously declines on multiple factors, like a rise in base interest rate."

The Bank of Korea is holding a monetary policy board meeting on Thursday.

"IPOs are very sensitive to the stock market atmosphere," said Lee Seok-hoon, a Financial Services Industry Senior Research Fellow at the Korea Capital Market Institute. "An IPO requires convincing investors with the blueprint a company has of its future. The plan likely seems less convincing at times of high market volatility as it is now."

BY JIN MIN-JI [jin.minji@joongang.co.kr]