Is the Stock Market Surge Bullish or a Bubble?

The recent surge in the Korean stock market has seen the benchmark stock index KOSPI rising 83 percent yesterday from October last year.

Securities companies, however, disagree whether the rebound is a bubble, tending to predict a bull market to attract customer investment. Given the steep rise in stock prices, however, more analysts are urging caution or even pessimism.

Most experts agree that the strong stock rebound in just a short period of time is cause for fear. The problem is the debate between pessimists who warn of a bubble and optimists who say the opposite.

○ Fear of an overheated stock market

Kim Hak-joo, head of research at Samsung Securities, is the first to have issued a warning on a bull market.

Known for being cautious, he released a report Monday with the unusual title “A Castle in the Sand: Stock Prices Leave the Economy.” In the report, he said, “Stock prices overshot with bubbles, but we do not see that this period will be as long as the market expects.”

This means that due to increased inflationary pressure, the released money will likely move out of the market when the economy recovers.

Some say the days of surprise earnings are over. Better-than-expected performances by major Korean companies in the first three quarters of the year pushed up stock prices, but this trend might have reached its peak.

FnGuide predicted that the operating profits of the top 500 listed companies peaked in the third quarter, and will see a correction from the fourth to the first quarter next year.

SK Securities analyst Won Jong-hyeok said stock prices are overheated by technical analysis. The Stochastic index, which locates stock prices in the price range of the past, exceeds 90 percent in the case of the KOSPI.

Won said, “When the stochastic indicator reached this level, stock prices always entered the correction phase.”

Lee Jae-gwang, head of research at Korea Investment and Securities, said stock prices have risen much higher than before. “The price-to-earnings ratio of the KOSPI is 12, higher than nine or 10 – the range it has moved since 2003,” he said. “If stock prices rise further, it will likely become a bubble.”

○ Defining a bubble.

Yet other experts predict stock prices will rise further. “We say it is a greedy period when investors bet on a bull market, but the market is not in that situation,” said Lee Seung-jae of Daeshin Securities. “Since investment confidence is not very excessive, stock prices can rise further.”

Jeong Seo-lim, a researcher of Mirae Asset Securities, said, “The price-to-book ratio is now 1.3, much less than 1.5 in 2007, when the market was bullish.”

Many say it is hard to make a judgment as the evaluation of the stock market differs by index.

Jeong Eui-seok, director of investment strategy at Shinhan Investment Corp., said, “The IT bubble in 2000 and the biotech bubble in 2005 were clearly bubbles, but it’s hard to call a bubble now because share prices move very differently, and in particular, major shares such as those of Samsung Electronics are strong because they are strongly supported by performance.”

jarrett@donga.com