Where are the Koreans? Sure, the South Korean stock market is near an 18-month high, and investment money is pouring in to the coffers of Samsung Electronics and its ilk. But the Korean bourse boasts a dubious distinction: It has less local investment than almost any other major market. Foreigners own an unprecedented 40% of outstanding shares on the Korea Stock Exchange in terms of market capitalization, up from less than 15% in 1997 and 5% in 1992. Of course, foreign investors call the shots in other emerging markets. But what sets South Korea apart is that so few local investors are jumping on the bandwagon. "The conclusion I got from 10 years of stock investment is that it's good for nothing," says housewife Kim Iye Kyoung, 47, who sold off the last of her stockholdings this past spring.
Koreans' lack of appetite for their own country's shares has many professional market watchers scratching their heads. After all, the stars appear aligned in Seoul's favor. Its economy, after a steep downturn, is projected to grow at a healthy 4.5% next year, up from around 3% this year. Fundamentals at the bluest of Korean blue chips, including Samsung, steel company POSCO (PKX ), and Hyundai Motor, look better than ever. Samsung, for example, expects to report earnings of $5 billion on sales of $36 billion for the year. Its foreign ownership: 59%. "Korea's technology stocks are very interesting," says Julian Lau, portfolio strategist at Fidelity Investments Management Ltd. "They will be major beneficiaries of any global economic upturn."
Koreans' conspicuous absence from the party, analysts say, is a matter of once burned, twice shy. Individuals and domestic institutions alike lost their shirts when the stock market tanked in 1998 amid the Asian financial crisis. Among the worst affected were domestic investment trust companies, which operate like mutual funds. Assets held in trusts have shrunk 41% in the past four years, to $130 billion. Insurance companies, meanwhile, invest less than 10% of their assets in stocks, while Korea's government-managed national pension fund invests all but 7% of its $92 billion in domestic bonds and government projects. Korean institutional investors now account for less than 16% of the market, down from a high of 30.7% in 1996. "Unless trust companies regain confidence from individuals and institutions adopt a buy-and-hold approach, foreigners will continue to dominate the local share market," says Park Jin Soo, general manager at Korea Investment Trust and Securities Co.
The market's dependence on foreign money presents an obvious risk: If a crisis erupts, that capital could flee in a matter of days. And South Korea is of course more vulnerable to such an event than most nations. "If Korea is hit by an unexpected shock like another crisis from North Korea, spooked foreigners could yank their investment out of the country," says Lee Chae Kwang, chief investment officer of Hanil Investment Trust Management Co. in Seoul. That's why some government officials say it's important to boost Korean investment. "We need a safety lever for our capital market," says Kwon Dae Young, a deputy director at the Finance Ministry. "Our institutional investors must become more active."
One concern of the Korean business Establishment has not been born out: Foreign shareholders haven't tried to take charge of any Korean companies. "Initially, we feared they might snatch management control from us, but in reality they are just interested in improving transparency," says Chang Il Hyung, senior vice-president of Samsung Electronics. Foreigners also push for steps that bolster shareholder value. Says Chang: "We certainly pay much more attention to shareholders now." Too bad so few of them are Korean.
By Moon Ihlwan in Seoul