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Coronavirus, hedge fund fiasco dim brokerages' earnings outlook

All News 14:11 February 19, 2020

SEOUL, Feb. 19 (Yonhap) -- A dark cloud is hanging over the earnings outlook for South Korean securities firms in the wake of the new coronavirus outbreak and a hedge fund scandal, market watchers said Wednesday.

The COVID-19 virus outbreak has put the brakes on the local stock market's rally, which started late last year, as it is widely feared to hit South Korean corporate earnings down the road.

Making matters worse, several brokerage houses are expected to be investigated regarding a suspension of fund redemption by South Korea's largest hedge fund, Lime Asset Management Co.

Analysts say the coronavirus outbreak may make a dent in the earnings of major South Korean companies already smarting from slackening demand amid a slowing economy.

Falling corporate earnings usually come as a drag on the stock market, which inevitably results in weaker profits for securities companies.

According to market tracker FnGuide, the first-quarter operating profit of 105 major firms listed on the country's main bourse is forecast to total 19.3 trillion won (US$16.2 billion) as of Tuesday, down 8.9 percent from an estimate a month earlier.

From a year earlier, the figure is also down 1.5 percent. The surveyed firms cover businesses for which three or more local securities companies have put forward earnings forecasts.

Coronavirus, hedge fund fiasco dim brokerages' earnings outlook - 1

The operating profit outlook for the oil and gas sector posted the largest on-month drop of 67.6 percent, followed by the aviation industry with 43.4 percent and the shipbuilding sector with 31.1 percent.

The downbeat projection comes amid gloomy reports on the future performance of Asia's fourth-largest economy following the outbreak of the deadly novel coronavirus.

In a report released Tuesday, Nomura Securities of Japan predicted the South Korean economy could gain 0.2 percent on-year in the first quarter of this year under a basic scenario in which China's lockdown continues till late February and the virus spreads only within China.

But South Korea's economy could shrink 2.9 percent during the January-March period under the worst-case scenario of the lockdown lasting until the end of June and the virus continuing to spread in South Korea.

South Korea's full-year economic growth is forecast to reach 1.8 percent, compared with a 2 percent gain in 2019, under the basic scenario, with the figure likely to slowing to 0.5 percent under the worst-case scenario.

A day earlier, global ratings agency Moody's cut its forecast for South Korea's 2020 economic growth to 1.9 percent from 2.1 percent, citing the economic fallout of the new coronavirus.

The central Bank of Korea's has projected Asia's fourth-largest economy to expand 2.3 percent on-year in 2020.

Stung by the COVID-19 outbreak, the South Korean stock market has been sluggish. The benchmark Korea Composite Stock Price Index (KOSPI) closed at 2,208.88 on Tuesday, down 1.48 percent from the previous day and well below the pre-coronavirus 2,250-point level.

Coronavirus, hedge fund fiasco dim brokerages' earnings outlook - 2

The coronavirus outbreak is not the only negative factor for local securities companies. It is feared that South Korean authorities' inspections into the Lime scandal will put pressure on them.

The Financial Supervisory Service (FSS) is scheduled to launch a series of on-site inspections into banks and securities firms that served as Lime's sales representatives.

Citing a cash crunch, Lime froze withdrawals from a trade financing fund worth an estimated 244 billion won in October, sparking an outcry from angry investors.

The Lime scandal began to unfold in July last year when the FSS began probing suspected irregularities at the hedge fund, forcing spooked investors to scramble to withdraw their money.

The watchdog's upcoming inquiry is widely expected to center on suspected fraud and misselling by Lime and its sales agents, including big-name banks and brokerages. Misselling refers to selling financial products to customers without providing adequate information or explaining the high risks involved.

In addition, victims of the Lime scandal have take legal action against Lime and its sales agents, prompting prosecutors to kick off an investigation.

Market watchers said Lime customers and banks stand to lose big from the hedge fund's botched investments. Lime has halted withdrawals of funds worth an estimated 1.7 trillion won, including the trade-financing fund in question.

In a report released Tuesday, eBEST Investment & Securities Co. warned the Lime fiasco will likely escalate investor concerns and lead to tougher rules on hedge funds, impacting the whole financial sector negatively.

"The Lime fiasco is expected to lead to reduced sales of hedge funds and have a negative impact on securities firms' earnings," an analyst said on customary condition of anonymity. "But the painful truth is that the scandal has made a dent in customer trust in financial institutions."
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