Global Growth, Valuations to Drive Kospi Index Rally, Credit Suisse Says

Global economic growth and cheap valuations may cause South Korea’s Kospi Index to rally 19 percent next year, according to Credit Suisse Group AG.

The benchmark index, the best performer among gauges for the world’s 15 biggest markets this year, may climb to 2,300 next year, according to Seok Yun, Seoul-based head of research at Credit Suisse and the top-ranked analyst for South Korean stocks in the 2010 Institutional Investor poll, at a press briefing in the South Korean capital yesterday. The stock gauge rose 1.3 percent yesterday to 1,929.32.

“The market’s increased comfort with the sustainability of global growth, along with continued low interest rates and abundant global liquidity, leads us to see a strong case for the expansion of multiples in 2011,” Yun wrote in his presentation slides. “Foreign fund inflows will continue next year.”

Manufacturing in some of the world’s largest economies grew in November, a sign that the global recovery is gaining traction as the year draws to a close. Output in the U.S. expanded for a 16th straight month, U.K. manufacturing growth unexpectedly accelerated to the fastest in 16 years, and China’s output grew at a faster pace for a fourth month.

The Kospi’s 769 stocks trade at an average 11 times estimated earnings, the lowest in Asia after Pakistan and Vietnam. The benchmark index rose to a three-year high on Nov. 10 as a continued recovery in the nation’s economy and speculation that the won will strengthen drew overseas investors. It rose 0.9 percent to 1,946.83 as of 2:05 p.m. today, taking its 2010 gain to 16 percent.

Korea’s Growth

South Korea’s gross domestic product increased 0.7 percent from the previous three months, when it gained 1.4 percent, the Bank of Korea said in Seoul today.

Foreigners have bought a net 17.9 trillion won ($15.6 billion) of Kospi equities so far this year, compared with 32.4 trillion won for the whole of last year, according to Koscom Corp., which provides financial data from Korea Exchange Inc.

Credit Suisse has an “overweight” recommendation on technology companies, saying the industry offers the best return potential should global growth prove to be more resilient than investors expect. It also favors financial shares because of their “decent” earning recovery outlook.

Samsung Electronics Co., Posco, Shinhan Financial Group Co., LG Display Co., S-Oil Corp. and Samsung Fire & Marine Insurance Co. are the brokerage’s top picks in South Korea, according to the presentation slides.

Further Gains

Credit Suisse joins other brokerages from Deutsche Bank AG to Citigroup Inc. and JPMorgan Chase & Co. in predicting gains for South Korean equities.

The Kospi may reach 2,200 by June 2011, Deutsche Bank’s Chanik Park said last month, while Citigroup analysts led by Michael Chung predict the measure will rise to between 2,200 and 2,300 in the first half of next year. JPMorgan said on Nov. 17 the Kospi may reach 2,300 at the end of 2011.

Credit Suisse’s Yun said there haven’t been “big disturbances” in financial markets after North Korea on Nov. 23 shelled a South Korean fishing community and military base, killing four people. The Kospi yesterday erased all of its post- attack decline of 1.7 percent.

Japan and the U.S. will conduct a joint military exercise starting tomorrow until Dec. 10, two days after South Korea and the U.S. finished maneuvers in response to North Korea’s deadly artillery bombardment last week. The South will hold artillery drills on Yeonpyeong, the island shelled last week, on Dec. 6, television broadcaster MBN reported today, citing government officials it didn’t identify.

Market Impact

The “obvious question we can ask is, is there any nation that wants the South-North Korea situation to deteriorate further from here?” Yun said. “The answer is no, and that they ultimately want a happy ending. If we look at the past two decades, there were worse provocations by the North than the latest one, and we didn’t see long-lasting impact on markets.”

Investor Mark Mobius also said in a posting on his blog on Nov. 29 that military tensions on the Korean peninsula will probably have a “short-lived” impact on South Korean stocks and the nation’s outlook is “positive” because of economic growth.

To contact the reporter on this story: Saeromi Shin in Seoul at sshin15@bloomberg.net.

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net.

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