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Volatility Decline Evokes Kospi Rally of 2010

The last time share-price swings in South Korea fell this low versus peers in emerging markets was May 2010, when the Kospi index surged 28 percent in 12 months.

Volatility in the nation’s benchmark equity gauge has halved since July, with a measure of 30-day swings falling to 8.6 on Oct. 11 versus 14 for the MSCI Emerging Markets Index, data compiled by Bloomberg show. The International Monetary Fund says South Korea is among nations best placed to weather a cut in U.S. monetary stimulus because policy makers have room to boost government spending and reduce interest rates.

Growing demand for the most-stable equities has spurred a record 31 straight days of foreign inflows into South Korean shares, while concern over Federal Reserve tapering and America’s debt-ceiling debate sent the benchmark gauge of U.S. stock volatility to a three-month high on Oct. 8. Credit Suisse Group AG (CSGN), UBS Wealth Management and Bank Julius Baer & Co. say they’re bullish on South Korea as smaller price swings lure investors to companies from SK Hynix Inc. (000660) to LG Chem Ltd. (051910)

“Korea is our biggest overweight market,” Sakthi Siva, a strategist at Credit Suisse in Singapore, said in an Oct. 7 e-mail. “I always suggest buying on dips.”

The Kospi’s 30-day volatility is 59 percent below the five-year average, according to data compiled by Bloomberg. The South Korean gauge outperformed the MSCI emerging markets index by about 7 percentage points when price swings fell this low versus the 21-country measure in 2010.

Relative Value

The Kospi trades at 1.1 times net assets after gaining 1.4 percent last week. That’s a 33 percent valuation discount compared with the MSCI Emerging Markets index, which has a multiple of 1.6. The South Korean index fell 0.2 percent to 2,020.27 at the close in Seoul today.

International investors purchased a net $1.1 billion of South Korean shares last week, bringing inflows to about $10.4 billion since the buying streak began on Aug. 23. SK Hynix, the world’s second-biggest maker of memory chips, attracted a net $1.4 billion. That’s the most after Samsung Electronics Co. (005930), South Korea’s largest company by market value. LG Chem, the biggest chemicals producer, had $170 million of net purchases.

“The problems in the U.S. and the weakness of equity markets in general provide a good buying opportunity” in South Korea, Gary Dugan, the Singapore-based chief investment officer for Asia and the Middle East at Coutts & Co., said in an e-mail interview on Oct. 8. “The market will break to the upside.”

Yields Rise

South Korean shares outperformed government bonds last week. Yields on the nation’s 10-year notes climbed 10 basis points, or 0.10 percentage point, to 3.52 percent while the won was little changed at 1,071.40 per dollar. The cost of protecting the country’s sovereign debt against nonpayment using credit default swaps fell about 6 basis points to 68 basis points, according to data provider CMA.

Further gains in stocks this year may be limited amid investor concern that the world economy will slow, Kwon Hyuk Sang, the Seoul-based chief investment officer at Hanwha Asset Management Co., which manages $48 billion, said on Oct. 10.

The IMF reduced its global growth forecast for this year to 2.9 percent from 3.1 percent on Oct. 8 and warned that a U.S. government default could “seriously damage” the world economy. South Korea’s exports dropped 1.5 percent in September, following a 7.7 percent jump in August.

Global economic risks will fail to derail South Korea’s growth, Finance Minister Hyun Oh Seok said in an interview in Washington on Oct. 10. He’s sticking with a forecast for 3.9 percent expansion in 2014, which would be the fastest pace since 2010.

Profit Growth

Corporate profits will probably climb as much as 15 percent next year, according to Nam Dong Joon, the head of equities at Samsung Asset Management Co., the nation’s biggest private money manager with $118 billion of assets.

“It’s one of the most-preferred markets for investors that want to shun high risks,” said Nam, who predicts the Kospi may climb as much as 14 percent next year. “We’re seeing more long-term investments coming into the Korean market.”

The Kospi 200 Volatility Index, a gauge of expected swings in South Korean shares derived from options prices, has declined 20 percent during the past three months. The Chicago Board Options Exchange Volatility Index, the benchmark gauge of U.S. options known as the VIX (VIX), climbed 12 percent in the same period.

Stable Market

Healthy government finances will support South Korea’s financial markets, according to Yonghao Pu, the Hong Kong-based regional chief investment officer for Asia Pacific at UBS’s wealth management unit, which oversees about $1.9 trillion.

South Korea’s gross government debt this year will amount to 36 percent of GDP, in line with the 35 percent level for emerging markets as a group, according to IMF estimates. The nation’s current-account surplus will grow to 4.6 percent of GDP, compared with 0.8 percent for developing countries, IMF projections show. South Korea’s foreign exchange reserves surged by $5.8 billion to a record $336.9 billion last month.

The country’s inflation rate fell to the slowest pace in 14 years in September, while the central bank left its benchmark interest rate at 2.5 percent, the lowest level since 2010, for a fifth consecutive meeting this month.

Bank Julius Baer’s Mark Matthews favors companies whose profits are most tied to economic growth, including LG Chem, as valuations remain depressed. The chemical maker trades for 15 times earnings, compared with a median of 19 for global peers.

“It makes sense to buy” South Korean shares, Matthews, the head of Asia research at Bank Julius Baer, which has about $336 billion of client assets, said in a phone interview on Oct. 8. “A stable market is a positive factor.”

To contact the reporter on this story: Sharon Cho in Seoul at ccho28@bloomberg.net

To contact the editor responsible for this story: Michael Patterson at mpatterson10@bloomberg.net

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