The Stalwart: Why the KOSPI Rallied

I had an interesting discussion with an asian fund manager a few weeks ago whereby we discussed Korean stocks and the "Korean Discount" on the market's PE. He stressed very much the idea that basically the only reason why the KOSPI rallied so much was just because the Korean government made it so, by changing the rules for domestic investment. Upon reading an article in Barron's, this argument has come back to me, and I think it does indeed seem very possible that it has just been a matter of regulation change.

And Koreans at last are snapping up their own shares because of low interest rates and because government efforts to cool real-estate speculation are redirecting money to stocks. Pension funds are allocating more cash to equities. Individuals this year were allowed at last to open retirement accounts linked to stocks. And the Kospi's break this year above its longtime ceiling of 1,000 was a bullish signal to investors around the world.

The Korean market trades at 10 times earnings, above its average price-earnings ratio of 8.3 times since the 1998 financial crisis. To be sure, that's still below the 12 times multiple for the entire non-Japan Asia universe.

[We added the italics]

Now we here are still trying to figure out all the exact changes that were made in government policy, in addition to a change in retirement allocations, but the above paragraph shows that there was also some change in relation to the government's efforts to shift funds from real-estate into the stock market.

In any case, it seems that those on the "inside" of what's going on with Korea were probably able to load up as the investment policy change became more and more evident, and essentially call the market move, which has been 45%. Thus there may have been more than meets the eye when it comes to this rally, and maybe we shouldn't be patting ourselves quite so hard on the back for our successful Samsung/Posco/LG/ SK "stock picks", unless we also called the regulatory shift as well. More on this from Business Week earlier this year:

Korea's National Pension Fund, which manages $127 billon, has set a goal of increasing its exposure to stocks from the current 8% to 10.7% by 2009. By then assets under management at the state fund are expected to more than double, to $289 billion. And Korea is due to introduce a 401(k)-style corporate pension scheme by December that will probably drive up stock investment.

This article indicates that there's more to come this December in terms of pro-market regulatory reform. Does this mean the rally should continue into 2006?

Disclosure: the author holds ADR's of Posco (PKX).

What is This?

The Stalwart is a blog written by Joseph Weisenthal, covering such topics as stocks, business, economics, politics, technology, gambling, chess, poker, economics, current events, music, math, Chinese food, science, randomness, kurtosis, sports, evolutionary fitness, and anything else of the author's choosing. The words contained herein are the author's own, not affiliated with any other firm or employer.

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Why the KOSPI Rallied

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