Seoul shares dropped 2.7 percent on Monday, scoring their biggest fall in nearly nine months, with foreign investors retreating from South Korean blue chips such as POSCO as an aversion to risk continues to pound global markets.
Emerging markets have been hit especially hard in the world-wide slump that started last week, with foreign investors ending heavy net sellers for a third consecutive day in the main KOSPI, bringing their total sales during the period to 739.2 billion won ($778.1 million) worth.
The index has now fallen four sessions in a row, erasing $48 billion from its market value, and falling to its lowest close since January 31. "This is beginning to turn into panic. We are not seeing falls based on fundamentals, just the psychological impact of having so many markets fall at the same time," said Choi Yong-kyu, a fund manager at IBK SG Asset Management.
"But if you had to explain it, you could name the yen carry trade, or worries that China will tighten its monetary policy, or the outlook for the US economy," he added. The benchmark Korea Composite Stock Price Index (KOSPI) dropped 2.71 percent to end at 1,376.15 points, its lowest close since January 31.
The index has now dropped 6.45 percent since hitting a record 1,471.04 points on February 23, posting last week its worst weekly fall since June 2006 as part of a rout in global markets. "This is not like September 11 (2001), when there was a clear issue so the sell-off was reasonable. Something bad seems to be happening, but there is no one clear reason. It's this 'unknown' that is making it worse so people are just selling out," said Lim Chang-gue, a fund manager at Samsung Investment Trust Management.
"March could be very tough. The general mood is not good at all," he also said, adding the KOSPI could fall as low as 1,350 points. Some analysts said the effects of the selling have been exacerbated by the unwinding of yen carry trades, or when investors borrow the low-yielding yen to invest in higher-yielding assets elsewhere.
As these investors move to pay back loans, they appeared to be selling holdings in other markets, such as South Korean stocks, analysts said. But some analysts were more optimistic, predicting South Korean markets could better weather the global slump than other regional markets.
Merrill Lynch on Friday raised its stance on South Korea to overweight, saying a strengthening won, stronger economy and a lower foreign ownership level compared to other regional markets would boost shares.
Recent outperformers in the rally to the KOSPI's record were the first in which investors booked profits, with Kookmin Bank down 3.57 percent to 81,000 won after sliding 6.15 percent last week. Shares in the country's biggest lender had surged 19.5 percent this year before they began tumbling.
POSCO Co Ltd dropped 8.52 percent to 333,000 won, erasing its gains on Friday when Warren Buffett's Berkshire Hathaway disclosed it owned a 4 percent stake in the steel maker as of the end of 2006.
Shares in the steel maker were also hit amid concerns a weakening won would increase costs of importing raw materials. The won hit an 18-week low against the dollar and a six-month low against the Japanese yen by early trade. But the weaker domestic currency lifted some exporters, with Kia Motors Corp gaining 0.81 percent to 12,450 won.