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Seoul stocks get a respite
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May 27, 1998: 7:55 a.m. ET
Analysts warn that South Korea's road to economic recovery will be rocky
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SEOUL, South Korea (CNNfn) - The South Korean stock market reversed a two-day free-fall on Wednesday as individual investors shrugged off nationwide labor strikes and hunted bargains, but brokers and analysts said it would soon return to its losing ways.
The Korea Stock Exchange composite stock price index gained 0.48 of a percentage point, or 1.49 points, to 313.48.
Brokers said without factoring in support from the top 10 blue chips, the composite stock index would have fallen to 270 points.
The index narrowly escaped crashing through the psychologically significant 300-point level after touching 301.22 when members of the militant Korean Confederation of Trade Unions went on strike.
"The stock market usually reacts before something really happens. It's not nasty news to weigh seriously on the market any longer," said broker Cha Hee-gun at SK Securities.
Worse times ahead?
However, volatility makes it difficult to determine when an event has finished weighing on the market. In fact, according to John Lilley, former U.S. ambassador to South Korea, the real bad news will come in autumn.
"I think the fall is going to be a very tough time," he said. "Because the strikes are all about unemployment. Unemployment is going to go up and there really is no social safety net yet."
The stock index has shed 45 percent from its 1998 of 574.35 on March 2, falling nearly 12 percent this week alone.
"The market looks really difficult. It's really hard to predict where the bottom is," said Keith Nam, branch manager at ABN-AMRO Asia Ltd.
Koh Won-jong, research head at Nomura Securities, said: "The index is expected to fall as low as 280 points. But the market is rapidly approaching its equilibrium level."
IMF reforms will hurt
Despite an agreement with the International Monetary Fund, South Korea has begun a protracted painful economic restructuring which would hurt worse than Koreans thought.
"The reforms are causing a social and economic revolution in Asia because you're breaking old rice bowls," said Lilley. "You're changing ways that brought the success story, the government-subsidized loans, the old boy networks, all these things are being challenged."
However, he did not foresee social unrest in Korea reminiscent of the wave of rioting that struck Indonesia - also laboring under IMF-mandated economic restructuring - earlier in the month.
"Korea is very different from Indonesia," he said. "The problem is that Korea at a working level is blocking investment."
Open doors not helping
Overseas investors, who had earlier seemed to be the only saviors of the fragile market, were still sitting on their wallets while domestic institutional investors went on a selling spree.
"Foreign and domestic institutional investors continued to sell en masse. But some individual investors hunted bargains in smaller-capitalized shares," said Kim Jong-kuk, a market strategist at Samsung Securities.
Offshore interests sold a net of 36.7 billion won ($26 million) worth of stocks, more than seven times Tuesday's 5.3 billion. Net selling by local institutions amounted to 21 billion won worth, the Korea Stock Exchange said.
"The mere opening of markets is not in itself a thorough-going reform," said Hank Morris, director of Industrial Research and Consulting Ltd. in Seoul. "We're in the nascent stages of the reform process."
Brokers said remarks by Finance Minister Lee Kyu-sung the government would study steps to support the sagging market prevented a sharp fall in the index, even though investors did not believe the government could actually boost the market. 
-- from staff and wire reports
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