How are South Korean financial markets performing amid the global uncertainties?

The South Korean economy is expected to perform relatively well, with a 2.80 percent growth target being set for 2013 and 4.0 percent projected in 2014 by the government. The present administration under President Park Geun Hye appeared to have managed the economy relatively well, with healthy economic numbers being released for the past few months during 2013, and the Korean Won (KRW) currency is trading on an upside at approximately 1,059.00 to 1,061.00 levels to the US Dollar early during Asian trading hours on November 26, 2013. Interest rates held steady at 2.50 percent when the Bank of Korea (BOK) announced earlier last month that it did not see inflation risks threatening the economy, as prices at both the consumer and producer levels stay relatively mild at less than six-tenths of one percent. The seven-day repurchase rate of 2.50 percent is kept unchanged. In a recent poll conducted by Bloomberg News, a forecast of 22 economists has concluded that the BOK might increase the benchmark rate to 2.75 percent in the third quarter of next year. The International Monetary Fund (IMF) has kept its forecast unchanged at 2.80 precent for 2013, but took down its original growth projections for 2014 from 3.9 percent to 3.7 percent.

With all these growth expansion plans/targets on the cards for the South Korean economy, the question turns to how are the financial markets performing relatively to global indices. The benchmark stock index or the KOSPI has risen to approximately 2,005.00 to 2,006.00 levels as of early Asian trading on Nov. 26. This represents an approximate increase of 12.7 percent over the lows of 1,780.63 at the close of trading on June 25, 2013. Price-to-earnings multiples for KOSPI and his constituents, including the likes of Samsung Electronics, Hyundai Motors, LG, among many others are still trading at a relatively low levels of approximately 9.00 to 10.00 times forward. The recent announcement made by the South Korean securities regulators to allow short-selling of financial stocks listed on the KOSPI index has resulted in an increase in trading volumes, and gradual tightening bid/ask spreads. These indicators appeared to indicate a relatively low valuation market, with an expected upside generally anticipated by many investors, both local and overseas.

In view of the many positive economic developments happening in South Korea, there are some potential risks that the government is well-aware including threats of aggression coming from North Korea, a rise in household debt levels that has to be monitored closely as several economists and policy makers have warned of severe risks to the overall market stability if household debt issues are not forcefully being dealt with. South Korea did experience similar circumstances during the 1997-1998 Asian Financial Crisis, with massive defaults and credit losses being reported daily, causing global market uncertainties, and spiralling out of control, until the IMF stepped in and forced the country to take on debt austerity measures. Fortunately, South Koreans were resilient and they worked closely together including melting massive amounts of gold and jewellery in order to revive the economy , and started rebuilding. Fast track forward to 2013 and beyond, it appears that the South Korean economy has started to turn robust; amid the growing financial volatilities that is taking place. According to Thomson Reuters News, South Korean exports have shown some improvements with projections for an expansion of approximately 7.00 percent to 8.00 percent for the month of October 2013 when the government announces the estimates on December 01, 2013.

Along with the general positivity going on in South Korea, many domestic retail investors have apparently look into ‘risk-on’ assets, including foreign equities. Bloomberg News Online reported on November 26, 2013 that one of the largest mutual funds, with USD 610.00 million assets under management (AUM) started to show some signs of a turnaround, and as well as one of the fund’s arms, ‘Mirae Asset Global Great Consumer Securities Master Investment Trust 1’ have saw its assets doubled in 2013 by increasing the fund’s exposure into global consumer stocks, attracting retail investors who are seeking to diversify their portfolio holdings outside of domestic equities. According to the Nov. 26 Bloomberg News article, the fund was reportedly to have grown to approximately USD 283.00 million since the start of the year, as institutional investors redeemed approximately USD 4.0 billion of KOSPI shares. The KOSPI index is currently up by approximately 1.0 percent year-to-date, trailing the 18.0 percent gain in the MSCI All-Country World Index.

Throughout the discussion on South Korean economic fundamentals, it appeared that the economy is defying several odds including myself, who are still marvelled by the economic growth projections. The global market risks have also been turning much significant as we head into the end of the year, and into next. However, that did not stop ordinary domestic retail investors from increasing their ‘risk on’ appetite to maximise their expected returns. Despite all these hype over South Korea’s economic transformation, and general robustness, there is still some degree of scepticism expressed by some, including myself of the relative bullish sentiments surrounding the South Korean financial markets. There are some questions including the pace of growth in the domestic financial markets, whether such growth could create asset ‘bubbles’, especially when there are some financial leverage exposures associated with the growing household debt issues that might one day spiral out of control the system if it is not managed well. However, such concerns appear to have been side-line by the relatively low public debt levels, and a healthy, and relatively mild inflation. Moreover, with the country slowly opening up its financial markets through free trade agreements, including the current negotiations over the establishment of a comprehensive free trade zone, known as the Trans Pacific Partnership or TPP, additional returns deriving from free trade activities could help to keep the momentum going.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc