Analysis: Can S.Korea's Kosdaq survive?

By JONG-HEON LEE, UPI Business Correspondent  |  Oct. 3, 2002 at 8:50 AM
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SEOUL, Oct. 3 (UPI) -- Where is South Korea's the technology-packed Kosdaq heading? This is the question being raised after the South Korean equivalent of the Nasdaq has been rapidly losing steam, with its index continuously tumbling.

Some analysts even believed the country's tech-rich secondary market may become another Neuer Markt, one of the biggest symbols of Germany's infatuation with the stock market, but which died last week.

The Kosdaq index, which rose to a record 283.44 on March 10, 2000, fell to 48.71 early this week, nearing the lowest-ever figure of 46.05 recorded in the aftermath of the Sept. 11 terrorist attack on the United States last year.

The Kosdaq market failed to rebound on Wednesday despite a 3.6 percent overnight rise of the Nasdaq Composite Index. South Korea's financial markets closed Thursday for the National Foundation Day holiday. The Kosdaq index has remained under the 100-point level throughout the year.

For the past year, the Kosdaq, an over-the-counter market modeled after the Nasdaq, was one of the world's hottest stock markets as it had enjoyed explosive growth thanks to an unprecedented boom in the country's information technology sector.

Since its inception in 1996, the Kosdaq had been used as the main channel of market capitalization for a number of start-up info-tech ventures.

But in recent months, the Kosdaq has suffered a crisis with more and more joining the selling spree. Kosdaq Stock Market Inc., the operator of the OTC market, said Thursday that 20 percent, or 152 companies among a total of 773 traded on the over-the-counter market, experienced a loss of more than 60 percent from last March.

The number of stocks suffering an 80 percent loss reached 35, including issues of Actoz Soft, Jungsoft, Hanbit Soft, Taeyoung Telstar, E-net and Gaonix Holdings.

Analysts say the Kosdaq market can hardly assume its role for capital mobilization, the main function of the stock exchange, citing that its market capitalization shrank by 55 trillion won ($48 billion) in early 2000 to its current 38 trillion won ($31 billion).

Kosdaq's capitalization is just one-seventh of the main Korea Stock Exchange with 263 trillion won ($214 billion).

To make it worse, local institutions and foreigners have recently left the Kosdaq market, which is much more vulnerable to negative factors than the main stock market because more than 90 percent of its investors are individuals. Foreign investors account for only 2 percent for now, according to Kosdaq Stock Market Inc.

Without foreign and local institutions, which are major players in the main bourse, there are no particular buying forces in the Kosdaq market, analysts said.

A majority of analysts say they see no immediate signs of recovery in the Kosdaq market as the factors that have been hurting the market are not expected to improve soon.

"The outlook about the Kosdaq market has been extremely gloomy, as a string of IT-related companies around the world are facing financial difficulties arising from weaker earnings," said Lim Song-hak, a chief strategist at Kyobo Securities.

The Kosdaq has already suffered from excessive supply problems because of massive rights offerings and bonds converted to shares. But the market situation is unlikely to improve because foreigners and local institutions stay away from the Kosdaq. "Investors are likely to stay away from the volatile Kosdaq market for the time being," Lim said.

Still worse, the Kosdaq market is facing cross-border competition from the Nasdaq stock market's expansion into Asia. Nasdaq's three-time-zone strategy would create a global, 24-hour stock market as would the Global Equity Market, an alliance of 10 exchanges being studied by the New York Stock Exchange.

Many analysts attribute the moribund Kosdaq market to outside factors such as the flagging consumer confidence in the United States and anxiety about an Iraq attack, which have unsettled South Korea's export-oriented economy.

But they say the main factor behind the tumbling Kosdaq is a slew of stock price manipulation schemes and the government's mismanagement.

The Kosdaq market has been plagued by a series of accounting scandals and unfair trading practice. Not a few business leaders, brokerages, government officials, and even relatives of President Kim Dae-jung have been discovered involved in stock price manipulation schemes in the Kosdaq market.

Online brokerage fraud cases are also increasing in the country, where online trading accounts for more than half of total market turnover. South Korea has the world's highest Internet penetration rate. Some watchers forecast more financial scandals will hit the already staggering Kosdaq market.

"The Kosdaq market has lost confidence in the wake of irregularities, forcing foreign investors to leave the market," said Son Byom-kyu, an analyst at Samsung Securities.

In a bid to keep the Kosdaq afloat, officials and regulators have pledged strong market-boosting measures. The Finance Ministry said it would spend $205 million to prop up the stock market.

Kosdaq authorities plan to introduce real estate investment trusts (REITs) and exchange-traded funds (ETFs) to expand its investor base. They also have decided to exempt trade commission fees they receive from brokerage houses for three months starting October.

"We will take every possible measure to boost the market," said Chung Ui-dong, the head of the Kosdaq, the Korea Securities Dealers Association. "We are mapping out measures to boost M&As (mergers and acquisitions) as part of reviving the Kosdaq market," he said.

But many analysts point out that the Kosdaq must implement more drastic measures to enhance transparency and secure flexibility to kick out fragile companies.

"Without sweeping restructuring, the Kosdaq market cannot restore investors' confidence and will remain sluggish in the future as well," said Kim Jie-young, a senior analyst at Samsung Securities.

"The Kosdaq market could suffer the same fate as Neuer Markt, which was recently shut down, and Nasdaq Japan that was closed in August," said Kim Young-min, a fund manager of Dongwon BNP Investment Co.

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