Manulife Asset Management, a unit of Canada’s largest insurer, is sticking with South Korea’s government bonds on bets the won will strengthen, even after foreign investors cut holdings of the debt by 2.6 trillion won ($2.3 billion) in August, the biggest withdrawals this year.
The company that oversees $37 billion of fixed-income assets is overweight in South Korean notes as the local currency is undervalued relative to the yen, a boon for the nation’s exports, and yields are attractive, Endre Pedersen, managing director at Manulife Asset, said in an interview yesterday. Korean securities accounted for 14.2 percent of Manulife’s Asia Total Return Bond Strategy fund as of July 31, up from 13.6 percent a month earlier, according to the company’s website. Pedersen said holdings haven’t changed much since.
“The currency is cheap relative to the yen,” said Singapore-based Pedersen at Manulife Asset, a unit of Canada’s Manulife Financial Corp. “We are looking at the debt from a rate perspective, the currency and credit. South Korea is ticking all these boxes.”
Manulife remains bullish on South Korean debt as analysts surveyed by Bloomberg predict the won will advance 6 percent against the dollar by the end of September 2013, the most among Asia’s 11 major currencies after dropping 3.9 percent in the past year compared with a 0.6 percent depreciation in the yen. Overseas funds’ holdings of Korean notes decreased as 2.8 trillion won of securities held by foreigners matured and a bond-market rally encouraged investors to lock in profits, the Financial Supervisory Service said in a statement on Sept. 5.
Manulife’s Asia Total Return fund rose 8.6 percent this year, exceeding the average 5.7 percent for its peers, according to data compiled by Bloomberg.
Korea’s government bonds handed investors the best return this quarter among 10 Asian markets tracked by HSBC Holdings Plc, as the central bank reduced borrowing costs for the first time since 2009 and the Asia nation’s sovereign credit rating was upgraded by Moody’s Investors Service and Fitch Ratings.
The yield on five-year notes fell 58 basis points, or 0.58 percentage point, this year to 2.88 percent yesterday and touched a record low of 2.82 percent on Sept. 5, according to data compiled by Bloomberg. In the Philippines, where the peso is Asia’s best-performing currency in the past year, yields on similar-maturity debt declined 27 basis points since Dec. 31 to 4.81 percent.
South Korean securities have returned 3.5 percent this quarter, compared with gains of 3.2 percent in the Philippines, 3.3 percent for Indonesia and 1.8 percent for India, according to local-currency debt indexes compiled by HSBC.
Won-denominated bonds are becoming expensive and there’s less scope for further gains as investors predict only one more reduction in borrowing costs this year, according to Hwang Jae Hong, who oversees 12 trillion won as head of fixed income at UBS Hana Asset Management Co. in Seoul.
The nation’s three-year notes have yielded less than the central bank’s benchmark rate since July 6, the longest period on record. The yield on the 3.25 percent securities due June 2015 was at 2.77 percent as of 2:13 p.m. in Seoul, compared with Bank of Korea’s seven-day repurchase rate of 3 percent.
Pressure for Correction
The central bank next meets on Sept. 13, with 15 out of 16 economists surveyed by Bloomberg News forecasting a 25 basis point cut. One predicts no change. The Bank of Korea reduced the policy rate in July for the first time since 2009 before having kept it on hold last month as the nation’s gross domestic product expanded 2.3 percent in the second quarter, the least since three months to September 2009.
“To be bullish on bonds at these levels, you need to have confidence that the Bank of Korea will lower rates twice more this year, which is unlikely,” Hwang said in a Sept. 6 interview. “Considering the central bank will probably cut the rate just once more this year and yields are already reflecting that, South Korean bonds are facing pressure for a correction.”
The won’s 29 percent depreciation against the yen in the past four years is boosting the competitiveness of South Korean exporters over their Japanese rivals, which will help support a rebound in the nation’s exports, Manulife’s Pedersen said. He declined to provide a forecast for the currency or yields.
“We expect to see Asian currencies as all long-term strengthening, but the one that has more catch-up to do is the Korean won,” Pedersen said.
Exports, which account for about half South Korea’s $1.1 trillion economy, dropped 6.2 percent in August, the sixth monthly decline of 2012, official data show. In Japan, where shipments make up 16 percent of gross domestic product, overseas sales fell 8.1 percent in July.
Technical indicators are signaling the won may extend its 5 percent gain since reaching a seven-month low in May, according to Tokyo-based Rakuten Securities Inc., which used 200- and 50-day moving averages as a guide. The currency traded at 1,128.15 per dollar today, according to data compiled by Bloomberg.
“The long-term trend from the technical point of view is that the won is likely to add to its appreciation,” Tsutomu Soma, manager of Rakuten’s investment trust & fixed-income business unit, said in a Sept. 7 interview. “The dollar is on a gradual path of decline versus the won.” He forecasts the greenback may reach an October low of 1,100.05 early next year.
South Korea’s debt rating was upgraded by Fitch on Sept. 6 to AA-, the fourth-highest investment grade and one level above Japan and China. Moody’s raised its ranking by one step to the fourth-highest assessment on Aug. 27, citing “strong fiscal fundamentals.”
Korea’s government debt amounts to 33.6 percent of the nation’s GDP, lower than Japan’s 212 percent, China’s 43.5 percent and Taiwan’s 36.3 percent, data compiled by Bloomberg show. The country’s foreign-exchange reserves stood at an all-time high of $317 billion at the end of August.
The nation posted a record current-account surplus of $6.1 billion in July, taking the full-year figure to $19.9 billion, the central bank reported on Aug. 29.
“The won has room to strengthen from here in the medium to long term, with its relatively cheap valuation and robust current account,” Takahide Irimura, Tokyo-based head of emerging-market research at Kokusai Asset Management Co., which oversees about $43 billion, said in an interview yesterday. “The won is likely to stay on a gradual appreciation path from here and a solid return can be expected from their bonds this year.”