Taiwan, South Korea Stock Slump Prompts State Buying, Increased Scrutiny
A stock-market slump that dragged Taiwan and South Korea’s benchmark indexes 20 percent below their highs prompted state-run funds to buy equities and Korean regulators to bolster scrutiny of trading activities. Benchmark indexes narrowed earlier declines.
Taiwan's government bought equities yesterday and this morning through four funds it controls, Philip Yang, a Cabinet spokesman, said. Korea Teachers Pension, the nation’s second- largest public pension fund, said it purchased about 70 billion won ($64 million) of stocks during the recent selloff. South Korea’s Financial Supervisory Service said it will monitor short selling and whether brokerages are following trading rules.
“The big concern here is wealth destruction, that is investors capitulate and sell, triggering a snowball effect,” said Gavin Parry, managing director of Parry International Trading Ltd. in Hong Kong. “If this continues, governments in the region will most probably step in.”
Taiwan’s Taiex Index completed its biggest six-day drop since September 2001 today, while the Kospi Index was headed for its largest six-day slump since October 2008 in Seoul. Stocks worldwide have tumbled this week after Standard & Poor’s reduction of the U.S.’s debt rating fueled concern the global economy will slow. Federal Reserve policy makers will hold a one-day meeting today as the downgrade fueled speculation America is headed for a recession.
“Once investors opt to reduce their emerging-market assets, countries such as Korea could be the first market they would consider divesting because it has many large-cap stocks and has relatively more liquidity,” said Chung Yun Sik, chief investment officer for equities at ING Investment Management Korea Ltd., which oversees about $16 billion.
The Taiex closed 0.8 percent lower at 7,493.12, after dropping 5.4 percent. The index is down 18 percent from a Jan. 28 high, having fallen as much as 22 percent. A decline of 20 percent or more signals a bear market to some investors.
The Taiex has tumbled 14 percent in the past six days, while the Kospi has lost 17 percent. The South Korean gauge has plunged 19 percent from its May 2 record, having lost as much as 24 percent. It slumped 3.2 percent to 1,810.51 as of 2:48 p.m. in Seoul, having tumbled 9.9 percent earlier.
“We have taken actions yesterday and this morning,” Taiwan’s Yang said by phone from Taipei today. The four funds controlled by the government are the labor insurance fund, labor pension fund, civil-servant pension fund and postal fund.
Yang declined to comment whether the government bought equities using the NT$500 billion ($17.2 billion) National Stabilization Fund, which was created in March 2000 to support markets when threatened by non-economic factors.
Taiwan will be “suffering the largest hit” from a U.S. and Euro-zone demand shock, Credit Suisse Group AG said in a July 28 report. Citigroup Inc. cut the year-end target for the Taiex to 8,770 from 10,000 based on the “de-rating” the market is undergoing, Peter Kurz, an analyst at the brokerage, said in a report today.
South Korea’s Finance Minister Bahk Jae Wan asked other ministers in a meeting today to bolster the market monitoring system, the ministry said in a statement today. The government should try to restore market confidence, Bahk said.
The Financial Supervisory Service asked pension funds, brokerages and asset-management companies to step up efforts to stabilize the market, according to an e-mailed statement today.
Korea Teachers Pension, which manages about 9.5 trillion won, plans to buy more stocks if prices fall further, Chief Investment Officer Lee Yun Kyu said by phone today. Korea Teachers has room to invest 300 billion won for the rest of the year, he said.
“I think we’re now at a bottom,” Lee said. “It was really a broad-based sell-off so that we plan to add evenly across sectors.”
Program trading on Kospi shares was stopped for five minutes today and yesterday after Kospi 200 Index (KOSPI2) futures fell more than 5 percent for more than a minute, Korea Exchange Inc. said. Trading of shares on the Kosdaq Index, which has more than 1,000 stocks, was also halted today and yesterday after the index tumbled in excess of 10 percent for more than a minute, triggering automatic curbs.
The exchange operator will keep a close eye on short selling and arbitrage transactions, Korea Exchange said in an e- mailed statement yesterday before markets opened, after an emergency meeting by Chairman Kim Bong Soo and other officials.
Investors typically use short sales to capitalize on an expected decline in the security’s price. It is the practice of selling a security that the seller does not own but is committed to repurchase eventually.
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