LONG sheltered by the Korean government, the Seoul stock exchange will put a welcome mat out for foreign investors Jan. 3.
The world's ninth-largest stock exchange with a capitalization of more than $100 billion has seen its key index fall to around 680 points in 1991 from an all-time high of 1,007 in April 1989.
"Korean companies are wrestling with a serious capital crunch," a Korean stock analyst said at a recent Boston seminar on investing in Korea. In order to get short-term loans from Korean banks, companies have to pay at least 19 to 20 percent interest, said the analyst, who asked not to be identified. For this reason, Korean firms welcome the stock market opening as an opportunity to raise lower-cost capital.
The Korean government is opening to foreign investors "because they have no choice," says Samuel Hayes III, a professor of investment banking at Harvard Business School.
"With the globalization of financial markets, investors are looking for capital all over the world and they are creating a marketplace in which the players, such as bankers and brokerage firms, have to be able to access a variety of different geographical markets," Mr. Hayes says.
Until now, foreigners were allowed to invest indirectly in South Korea by buying international trust funds such as the Korea Fund and the Korea Europe Fund or by purchasing convertible bonds issued by Korean firms. But this is the first time foreign investors will be allowed to invest directly in the market. "The Korean securities firms have been protected in a hothouse environment in South Korea which hasn't opened them to ... the same kind of competitive forces that are hitting other stockbrokers in many other parts of the world," Hayes says.
The move this week, which comes after years of pressure from the United States and other Western trading partners, represents a gradual opening for foreign investors rather than a full liberalization of the market.
To protect domestic firms from any sudden influx of foreign capital, a foreigner may buy no more than 3 percent of a company's shares. Combined foreign ownership of a company will be limited to 10 percent.
Also foreign investment in industries such as communications, transportation, and mining will be limited to 8 percent. Two companies, Pohang Iron & Steel and Korea Electric power, treated as sacred cows by the Korean government, remain closed to foreign investors, notes Henry Morris, Standard Chartered Bank's branch manager in Seoul, who spoke at the Boston seminar.
Another obstacle for foreign investors is that all transactions have to go though one of 31 Korean securities firms or four foreign brokerage firms. The four are Barings Securities of Britain, Jarding Fleming of Hong Kong, and Merrill Lynch & Co. and Citicorp from the US. The Korean government wants to ensure that much of the early business goes to Korean brokerage firms, the Korean stock analyst says.
Despite the restrictions, some analysts hold that this is a golden opportunity to buy Korean stocks because, they say, the stocks are undervalued.
Various Korean stockbrokers and foreign fund managers offer predictions on the flow of foreign money into the Korean market range between $500 million and $3 billion, Mr. Morris says. His own forecast is $1 billion to $1.5 billion.
Some analysts say US brokerage firms should take care in approaching the Korean market as the South Korean economy struggles with a tight monetary squeeze, high inflation, and a huge trade deficit.
Inflation is running now at 10 percent, the highest in 10 years. And the nation's customs-cleared trade deficit hit a record $10.77 billion in the first 11 months of 1991, up from a $5.39 billion in 1990.
"For foreigners with an interest in Korea, this is a time to really do one's homework. It may be preferable to wait until mid-1992 before moving into the market," cautions Douglas Johnson, international investment strategist with Merrill Lynch. He projects that the Korean stock market may gain from its recent lows in early 1992, but those gains are unlikely to become a major rally through the remainder of the year.
John Lee, assistant vice president of Scudder, Stevens & Clark Inc., which manages the $230 million Korea Fund, projects that in the next two or three months the stock price will go further down as Korean investors sell stocks to pay back money they borrowed from their stockbrokers. In the long run, however, the market will rebound especially as the Korean government prepares for general elections in the spring.
"Traditionally the Korean stock market goes up when there are elections," Mr. Lee says.