South Koreans Wave the Flag and Buy Stocks

In the darkest days of South Korea’s recession more than a year ago, the government appealed to citizens’ patriotism to donate their gold jewelry and shore up the nation’s vanishing foreign reserves.

Today, in a measure of how things have changed, South Koreans are showing their patriotism by pouring their money into the stock market, helping to drive it to a three-year high.

South Korea’s market surged last week, climbing 5.1% on Thursday alone to close at 810.54 points, capping a 35% rise since the beginning of the year. It even gained a fraction on Friday, when the rest of Asia fell.

To be sure, there is a lot more going on than patriotism. Propelling South Korea’s sharp run-up over the last several months are several factors, analysts say, including improved prospects for Asia’s second-largest economy, tag-team buying by foreign and local investors, a structural shift in South Korean capital markets and a bit of good old-fashioned greed as new domestic investors watch their neighbors make obscene profits and rush to join the party.

But in this fiercely proud nation, savvy marketers have also put stocks on the average South Korean’s radar screen with an appeal to patriotism.

A sign in a branch office of Daishin Securities reads, “Increasing your family’s income may be part of being patriotic.” The billboard for Hyundai’s new powerhouse Buy Korea fund shows fighter jets taking off from a giant aircraft carrier. The message: Investing in South Korean companies will help your nation recover quickly and regain its standing at the global table.

The result has been a flood of money into equities. The amount invested in the South Korean stock market nearly doubled, to $15.97 billion, betweenFeb. 6 and April 30.

The Buy Korea fund alone went from zero to $4 billion in 60 days. “I believe more money will come in as interest rates come down further,” said Choi Dai Moon, general manager of equities with Hyundai Investment Trust, the Buy Korea fund’s manager. An additional $7.2 billion sits in investment accounts waiting to be tapped.

Small-investor enthusiasm also dovetails with broader policy objectives--one reason analysts believe the government will use its influence, and interest rate policy, to extend the rally as long as possible.

It all adds up to a strong vote of confidence in an economy that was on its knees a little more than a year ago. But the ride ahead looks bumpy, analysts warn, and foreign buyers tempted to pile in now might consider waiting until the next air pocket.

“We’re pretty bullish” for the year 2000, said Richard Samuelson, South Korea branch manager for SBC Warburg Dillon Read. “But we think it will be volatile. There will be better opportunities to buy ahead.”

“A lot of people do it, so I just started buying,” said an out-of-breath Seong Jun Hee, 41 and owner of a small restaurant, as he dashed into a Ssangyong Securities branch. Seong hurried to lock in a $418 profit made on a South Korean chemical stock in five days. “I just listen to others on what’s good. . . . I don’t really have my own views.”

Even professionals find themselves a bit breathless these days as they try to understand this market’s pace and upward intensity. “Most of our near-term targets have been blown out of the water,” said Allister Sword, a dealer with W.I. Carr. “We’ve already run out of expectations for this year and next.”

Nor did the Bank of Korea’s announcement Thursday that it would leave interest rates unchanged--the market had hoped the central bank would reduce rates from their current 7.5% level--dampen investors’ enthusiasm.

Instead, they quickly turned their attention to another government statement the same day that the 2% target for the gross national product projected for this year might come in closer to 4%.

Beyond the country’s currency stability, rating agency upgrades and other positive economic indicators, however, liquidity has played a huge role in the running of the South Korean bulls--a pattern mirrored across Asia.

Starting late last year, foreign investors started moving into South Korean equities hoping to catch the bottom. That in turn sparked interest among small domestic investors, who interpreted the foreign interest as a big vote of confidence in their nation’s future.

“We had two drivers,” said Lee Seung-Hoon, a vice president of Morgan Stanley. “One got tired and was replaced by the other, the foreign [stock] buyers by Koreans.”

Small local investors also have been nudged out of other investments even as they’ve been lured into stocks. Crisis aside, South Korea still has more than $500 billion stashed away by a high-saving population during three decades of double-digit economic growth.

Interest rates on bank accounts, the traditional parking lot for individual savings here, have dropped from a high of 30% in early 1998 to today’s single-digit levels. Prices on the country’s other common store of value, real estate, have plunged, making stocks the only high-yield game in town.

A rising stock market helps South Korea’s highly leveraged companies reduce their debt-to-equity ratio and makes it easier for still-shaky banks to set aside money to cover bad loans, said Lee Hun-Jai, chairman of the Financial Supervisory Commission. The country is also trying to develop its underdeveloped financial markets.

South Korea has also been attractive because its economic reform efforts seem more serious and more aggressive than those of Thailand or other victims of the Asia crisis. Many reforms in Thailand, for instance, took much longer to implement.

South Korea’s banks have been recapitalized, with additional cash injections likely; the government has held a tough line against the bloated chaebol conglomerates; foreign players have been allowed into the financial sector; and labor unions have seen their power checked.

SBC Warburg Dillon Read, among others, believes the market is due for a near-term correction, given that few South Korean companies are yet making money, but sees it hitting as high as 950 next year.

If the market does lose altitude as a result of higher interest rates, a pullout by foreigners or some external shock, analysts said, the drop could be sharp.

Others, like the FSC’s Lee, however, say South Koreans--having recently lived through a deep economic crisis--may in fact understand the market’s downside risk far better than do some of their American counterparts, who have seen little but bull market conditions for almost a decade.