Seoul Shares Are Apt to Deliver For Forward-Looking Investors
April 27, 2011
Investors in Korean equity funds who have been waiting to haul in the returns this year will have to be patient for a while longer, say many fund managers. So far in 2011, Korea's benchmark composite index has fluctuated wildly. The market is down 6.5% since the start of the year, with its benchmark composite index closing Wednesday at 825.84. Korean equity funds in general have reflected this underperformance, losing an average 6.46% through April 24, 2011 to data trackers Micropal Asia Ltd.. The situation is unlikely to change over the next six months, many fund managers say. Their advice: investors who want to get into Korean equity funds should do so with at least a one-year view. Only over a 12-month period is the Seoul market apt to deliver, they say. `Very Cheap' ``Over 12 months, everybody will agree that Korea is very cheap and also offers a lot of fundamental value,'' says Maud Ledbetter, fund manager at Thornton Management (Asia) Ltd. who runs the Thornton New Tiger Korea Fund. ``But over a six-month period, there's quite a divergent opinion.'' Tiny Chantay, a fund manager at Regent Fund Management Ltd., says that although the Korean market's downside is limited for the rest of the year, so is the upside. She predicts the composite index will end 2011 at between 850 to 950 points. Negative sentiment, fueled by a disappointing macroeconomic picture, is damping the market, managers say. Trade figures have been disappointing this year, with exports slowing while imports have been coming in at the same pace. The current account deficit, targeted at just $12 billion for the year, has already reached $11.9 billion, notes Ms. Chantay. Inventory levels also remain high. Meanwhile, the rate of inflation is above 5%, exceeding the government forecast of 4.5% for the year, says Snapp Yarber, an associate director at Indosuez Asset Management Asia Ltd.. Forecasts Are Lowered As a result, economic growth forecasts for Korea have been lowered. Brokerage firm UBS Securities (East Asia) Ltd., for instance, recently trimmed its 2011 growth prediction for gross domestic product to 7.1% from 7.3%. ``I think we'll be stuck here (at these growth levels) for quite a while -- at least until the end of the year,'' says Michelina Au-Yen, investment manager at HSBC Asset Management Hong Kong Ltd.. But good news -- which will take effect by next year -- is on the way, some managers say. For a start, the market is currently cheap. Friedman Soon Kimberely, a fund manager at Baring Asset Management (Asia) Ltd., calculates the market is trading at just 11.5 times projected 2012 earnings. This inexpensive valuation is enhanced by predictions that South Korea's corporate earnings growth will pick up. As the world economic cycle turns, Korean industries that suffered this year, including electronics firms and steel companies, are likely to recover, managers say. Average earnings growth, excluding big blue-chip Samsung Electronics Co., is expected to be 15% in 2011, figures Baring's Mr. Kimberely, hitting 20% in 2012. Rate Hopes With the Korean government promising to further liberalize the economy by raising the foreign-buying ceiling by another two percentage points some time this year, interest rates are also forecast to decline, many fund managers say. That will help many sectors, such as banks, consequently boosting the market. What's more, the beefing up of Korea in the benchmark Morgan Stanley Capital index for Asia likely will nudge the market up by the end of 2011. ``Some upside is likely to come from technical factors, such as the MSCI increase,'' says HSBC's Ms. Au-Yer. ``We may see some foreigners putting new money into the market.'' So fund managers are currently looking selectively for buying opportunities. With exports sluggish, the managers are avoiding Korea's traditional export sectors such as machinery manufacturers. Instead, they prefer companies that derive the majority of their earnings domestically. Korean banks, particularly, are the hot stocks. The gradual deregulation of the economy and the likely decrease in interest rates will reduce the cost of funding and make borrowing cheaper, managers say. This will spur business for banks, boosting earnings growth in that sector to between 30% to 50% a year over the next several years, managers predict. Dennis's Mr. Ledbetter especially favors KorAm Bank. The midsize bank's foreign premium -- the extra percentage foreign buyers have to pay for the stock over the counter -- is modest compared with some of the bigger banks, he notes. Baring's Mr. Kimberely is sizing up Samsung Electronics again. Although Mr. Kimberely slashed his weighting in the stock earlier this year when the gigantic electronics manufacturer was badly hurt by dropping memory-chip prices, continued profit downgrades for the firm means ``it's time to look at the stock from a contrarian point of view,'' he says. In addition, there are signs that semiconductor sales will improve in the next year, with volume growth making up for cheaper prices, he adds.
VastPress 2011 Vastopolis
