South Korea will probably cut interest rates once more this year and let the won weaken to keep pace with policy makers seeking to shore up economic growth, according to the nation’s largest asset manager.
“The growth challenge for Korea is in front of us,” Kim Jun Sung, chief investment officer for equities at Samsung Asset Management Co., which oversees about $100 billion, said in an interview in Seoul yesterday. “There is a lot more room for flexibility” for a weaker won, he said.
The Bank of Korea, which unexpectedly cut benchmark borrowing costs on July 12, is likely to make another reduction before December presidential elections to help support indebted households, Kim said. Policy makers need to allow the won, which has gained 1.5 percent against the dollar this quarter, to weaken in the “short term” as Asian nations let currencies fall to stay competitive, he said. South Korea depends on exports for about half of gross domestic product.
Samsung Asset favors South Korean companies that are global and taking market share such as Samsung Electronics Co. (005930) and Hyundai Motor Co. (005380), Kim said. The nation’s benchmark Kospi index has fallen 7.1 percent from its April 3 high, compared with an 8.3 percent drop in the MSCI Emerging Markets Index, as exports slid almost 9 percent in July from a year ago and the central bank forecast economic growth will slow to 3 percent this year from the previous projection of 3.5 percent.
South Korea’s won fell as much as 0.2 percent today to 1,130.80 per dollar before settling little changed at 1,128.30, data compiled by Bloomberg show. The Kospi climbed 0.9 percent to 1,903.23, the highest close since June 20.
“There are still opportunities for companies to grow,” said Kim, 44, who worked for 10 years at Government of Singapore Investment Corp. before taking the position at Samsung last year. “Korean companies have been aggressive. They have been becoming much more competitive.”
Samsung’s main equity fund, Samsung For You Korea Representative Securities Investment Trust 1, has lost 3 percent in the past year, beating 94 percent of its peers, according to data compiled by Bloomberg. Samsung’s flagship mutual bond fund, Samsung ABF Korea Index Securities Investment Trust, returned 8.6 percent in the same period, outperforming 97 percent of its peers, the data show.
South Korea’s benchmark three-year bond yields dropped 51 basis points since the end of June to 2.79 percent. The yields touched a record-low of 2.76 percent on July 25.
The central bank lowered the seven-day repurchase rate 25 basis points, or 0.25 percentage point, in July to 3 percent. Inflation moderated to a 12-year low of 1.5 percent. Six of 16 economists surveyed by Bloomberg predict the Bank of Korea will cut the rate at a policy meeting tomorrow, while the rest forecast no change. Kim said he expects policy makers to reduce rates later in the year.
The won will probably weaken 0.1 percent from yesterday’s close to 1,130 per dollar by year-end, according to the median forecast in a Bloomberg News survey.
South Korea sent a combined 44 percent of its overseas shipments to China, U.S. and the European Union last year, according to trade ministry data.
South Korea is “very late to the game” with rate cuts, Kim said, after China lowered its benchmark rate twice this year in June and July, while Australia’s central bank reduced borrowing costs in May and June to support growth.
Exports from South Korea slid 8.8 percent in July from a year earlier, the biggest decline since September 2009, while consumer prices increased 1.5 percent, government data showed on Aug. 1. South Korea’s economy grew at the slowest pace in almost three years in the second quarter at 2.4 percent.
The Korean government is facing the same concern as other export-dependent countries, which is that economic “growth is becoming much more scarce,” Kim said.
A 66 percent increase in home prices in Seoul and surrounding areas in the decade to February 2008 raised household debt to record levels and triggered government measures to cool the market. South Korean consumer confidence dropped to the lowest level in five months in July as officials cautioned that a protracted European debt crisis is hurting the growth outlook for Asia’s fourth-largest economy.