Macquarie Group Ltd. recommended investors overweight South Korean stocks on “attractive” valuations and boosted its allocations for Indian equities on the government’s policy reforms.
“Although we remain cautious on the outlook for global growth, we believe much bad news has been reflected in Korea’s more attractive valuations,” Macquarie analysts Emil Wolter and Aniel Mahtani wrote in a report dated yesterday, raising the country’s rating from neutral.
South Korea’s benchmark Kospi index has climbed 7.4 percent this year, making it the third-worst performer among emerging markets in Asia. The gauge rallied 1 percent today after industrial production in the U.S., which accounted for 10 percent of Korean exports last year, beat estimates.
Companies on the Kospi index are trading at 10.6 times estimated profit, compared with the four-year average of 10.9 times, making it the lowest in Asia after Pakistan and Vietnam, according to data compiled by Bloomberg.
The analysts upgraded India to neutral from underweight, saying sentiment has improved even as execution and follow-through of policy reforms will now be the key determinants.
The BSE India Sensitive Index has surged 20 percent this year after Prime Minister Manmohan Singh’s government opened retailing and airlines to foreign investors, pared fuel subsidies and reduced a tax on domestic companies’ overseas borrowings in a wave of policy making after two years of gridlock. The Sensex trades at 14.7 times estimated earnings, compared with the MSCI Emerging Markets Index’s 11.6 times.
Macquarie also cut its allocation for Malaysia and the Philippines to underweight, citing valuations, domestic overheating and declining commodity prices. The FTSE Bursa Malaysia KLCI Index, which trades at 15.3 times estimated profit, and Philippine Stock Exchange Index with a multiple of 17 both rose to a record this month.