Shares in Korea and other emerging markets are forecast to lose ground as foreign investors are likely to pull out their funds ahead of a possible rate rise in the U.S. next month, analysts said Monday.
The global market is anxiously awaiting the next Federal Reserve meeting on June 14-15 when the U.S. central bank will decide whether to raise or keep its rate steady, depending on market data especially its job rate.
In a meeting last month, members of the Federal Open Market Committee sent the most clear and straightforward message, saying that it is time to increase the rate when it convenes in June.
“Some participants expressed more confidence that incoming data would prove broadly consistent with economic conditions that would make an increase in the target range in June appropriate,” according to the Fed’s April meeting minutes.
Although the committee said that it should maintain the federal funds rate of 0.25-0.50 percent amid downside risks to overseas economies stemming from a rate rise, the FOMC will be open to the possibility of increasing the rate in June.
According to analysts, the U.S. economy is expected to pick up over 2 percent in the second quarter of this year as economic data including jobs, retail sales and industrial production are positive, with inflation reaching its target.
With projections of a rate rise in the U.S. and a rate decrease in Korea, which will widen the interest gap between the two economies, the market will have to brace for possible capital outflows as funds seek higher interest yields.
“There are already signs showing equity funds from advanced and emerging economies exiting the market,” said Ko Seung-hee, an analyst at Mirae Asset Daewoo.
“This would be make it difficult for the local equity market to see (an increase in) foreign capital.”
The Korean Center for International Finance has also warned that foreign investors are expected to soon become net-sellers of Korean stocks from net-buyers on forecast of international oil prices rising and monetary easing in the U.S. coming to an end. There are signs that foreigners have been moving away from Korean shares when comparing their purchase data between March and April. In March, foreigners invested 3.4 trillion won in domestic stocks.
As the U.S. economy progresses and its benchmark rate is increased, Korea will need to brace for volatility in the stock, bond and foreign exchange markets, analysts say. The Korean won is likely to depreciate as the U.S. dollar strengthens following signs of solid growth in the world’s largest economy.
By Park Hyong-ki (hkp@heraldcorp.com)