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Long-term perspective essential for inter-Korean shares

By Yoon Ja-young

Inter-Korean stocks that had soared on the expectation they will benefit from economic development projects in North Korea are plummeting despite the historic summit between North Korea and the United States. Analysts say that investors should make decisions based on a long-term perspective.

"The friendly mood of the summit between North Korea and the United States warmed up the stock market, but inter-Korean stocks that investors put up for sale pulled down the index," said Seo Sang-young, an analyst at Kiwoom Securities.

The main index KOSPI dropped 0.05 percent, on the plunge of inter-Korean shares. Hyundai Rotem, a train manufacturer that investors expect will benefit when the two countries link railways, for instance, dropped 4.69 percent. Hyundai Elevator, the biggest shareholder of Hyundai Asan that is expected to lead North Korea's development project, also dipped 3.63 percent.

The plunge of inter-Korean shares was anticipated as institutional investors and foreign investors have been dumping stocks recently to realize gains after share prices have doubled over the past two months.

Morgan Stanley Private Equity, for instance, sold off 7 million shares of Hyundai Rotem early last week through a block deal. It pulled down its stake in Hyundai Rotem to 3.5 percent from 11.7 percent. Hyundai Rotem shares, which had soared to over 45,000 won, fell to around 36,000 won.

IMM PE also sold 25 million shares of Taihan Electric Wire through a block deal, while NH Investment & Securities sold off 4 million shares of Hyundai Steel.

Large shareholders of the companies that were deemed to benefit from inter-Korean cooperation also sold off shares. The Vitzro Group chairman sold off his 15.17 percent stake in Vitzrosys, which had soared 180 percent this year on expectation it will gain from North Korea business opportunities.

While huge investors have been realizing gains, small investors are likely to see sustained losses. According to Korea Exchange, 90 percent of those who purchased inter-Korean shares this year were small investors. However, their decision was not based on the fundamentals of these companies. The 63 inter-Korean stocks rose over 110 percent between January and middle of May, far surpassing the average 10 percent rise of the stock market, but these businesses recorded losses averaging 13.8 billion won.

Analysts agree inter-Korean cooperation will contribute to South Korea's growth in the long term.

"The peaceful mood on the Korean Peninsula will be a chance for the Korean economy to make a leap forward from chronic low growth," said Ha Keon-hyung at Shinhan Financial Investment.

"First of all, Korea's labor and capital will be injected to expand aggregate production. As North Korea gradually opens up, infrastructure investments that take a huge part of the inter-Korean economic cooperation will be included in Korea's construction service exports," he said, expecting an annual 5 trillion won in projects to pull up economic growth rate by 0.2 percentage point.

However, many analysts expect a price correction at inter-Korean stocks.

"The fundamentals of the economic cooperation have not changed much. Momentum for additional rise will be limited," said Ha In-hwan, an analyst at SK Investment and Securities, pointing out there was no "additional news" to suggest concrete plans for economic development.