Won `Mispricing' Against Yen Attracts BlueGold as Asian Economies Diverge

Buying the South Korean won and the Indian rupee against the yen is the best way to profit from Asia’s diverging economic growth prospects, according to BlueGold Capital Management LLP and Credit Agricole SA.

Investors who bought the won with yen will make returns including interest of 12 percent by year-end, compared with 7.7 percent for dollar-based investors, according to the median estimates in Bloomberg surveys of analysts. The rupee will have a gain of 10 percent versus the yen and 5.8 percent against the dollar, the surveys show.

“A fundamental mispricing will likely propel these currencies higher against the yen, which is still over-valued,” said Stephen Jen, managing director of macroeconomics and currencies at BlueGold in London. “Monetary policies will also diverge between China and Korea, on the one hand, and Japan, on the other.”

Swap traders are betting the Bank of Japan will maintain near-zero interest rates in the coming year, even as central banks in the U.S., China and South Korea follow Malaysia and India in raising borrowing costs. Kokusai Asset Management Co. has raised $1 billion for eight Asian emerging-market debt funds in the past year as Japanese investors pumped money into a region that has led the recovery from a global recession.

‘Fundamental Story’

The won may rise as much as 14 percent to 10.5 per yen by the year-end, said Jen, a former head of global currency research at Morgan Stanley. He declined to comment on his hedge fund’s positions. Korea’s currency has already strengthened 4.9 percent this year to 11.93 per yen.

Jen said valuation models, including purchasing power parity, suggest fair value for the yen is 110 versus the dollar. The Japanese currency has weakened 1.5 percent to 93.83 against the greenback this year as deflation deepened.

Buying Asian currencies is a “more risky” investment after they strengthened above or close to levels seen before the global financial crisis, Goldman Sachs Group Inc. wrote in a research note on April 15.

“We still like the fundamental story of Asian currency appreciation, but think it’s worth just noting that these currencies have moved a long way,” Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs in Hong Kong, said in an interview. Still, once the trades become attractive again, “it would be even better to do these against the yen,” he said.

‘Feel the Energy’

Japanese investors are finding Asian emerging markets more favorable in terms of budget deficits and growth than Europe and the U.S., according to Koji Fukaya, a senior currency strategist in Tokyo at Deutsche Bank AG, the world’s largest foreign- exchange trader. “They feel the energy when they travel around Asia,” he said.

Investment in India by Japanese mutual funds was 18 percent higher in March than January and gained 13 percent for South Korea, according to the Investment Trusts Association of Japan. That compares with a decline of 7.5 percent into the euro zone and a gain of 12 percent for the U.S.

Japanese financial firms plan to market at least 284 billion yen ($3 billion) of mutual funds to invest in Asian stocks and bonds in May, compared with 60 billion yen in April, according to Bloomberg data.

Kokusai Asset, which runs the world’s second-largest bond fund from Tokyo, offers an Asian sovereign debt fund that has made a return of almost 11 percent since September, compared with a loss of 2.1 percent on similar developed nation debt fund.

“We are bullish on Asian currencies,” said Takahide Irimura, head of emerging-market research in Tokyo at Kokusai, which manages about $59 billion of assets. “Most of the currencies in the region have a strong balance of payments.”

Debt Stakes

Nippon Life Insurance Co., Japan’s largest life insurer, will “boost” overseas debt stakes as the yen slides, Yosuke Matsunaga, general manager of the company’s finance and investment planning department, said yesterday.

Meiji Yasuda Life Insurance Co., the third-largest in the country, plans to invest 300 billion yen abroad. Dai-ichi Life Insurance Co. and Sumitomo Life Insurance Co. plan to “maintain” their unhedged foreign bond positions. The four insurers forecast the yen will depreciate to as weak as 105 per dollar in the year started April 1.

South Korea had a record current-account surplus of $42.7 billion in 2009, compared with a deficit of $420 billion in the U.S., government data show. Greece has a budget deficit of 13.6 percent of gross domestic product, compared with a ratio of 1.6 percent in Indonesia.

Swaps Contracts

Korea’s economy will expand 5.3 percent in 2010, compared with 2.1 percent for Japan and 3 percent for the U.S, according to the median estimate in Bloomberg surveys. Consumer prices may decline 1.2 percent in Japan this year, while increasing 2.8 percent in Korea and 2.1 percent in the U.S., the surveys show.

The Bank of Japan will probably leave rates on hold over the next 12 months, compared with 75 basis points of increases for the Federal Reserve, according to Credit Suisse AG indexes that track overnight interest-rate swaps. That may encourage yen carry trades, in which investors borrow the currency and buy higher-yielding assets.

Swap contracts, in which traders exchange a fixed rate for a floating one, indicate larger increases in Asia. The one-year swap in South Korea is 90 basis points more than the benchmark rate and the similar spread is 109 basis points in India. A basis point is 0.01 percentage point.

“At some point, the yen will be the only very cheap currency which you can use to fund carry trades,” said Sebastien Barbe, head of emerging-market research in Hong Kong at Credit Agricole, France’s biggest bank by branches. The won may gain about 19 percent to 10 per yen by year-end, he said.

To contact the reporter on this story: Yumi Teso in Bangkok at yteso1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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