Won Undervalued 20%, Korean Bonds Appeal, Eaton Vance Say

Won Undervalued by 20% to Eaton Vance Boosts Korean Bond Outlook
Won-denominated assets accounted for 3.99 percent of the $6.5 billion Eaton Vance Global Macro Absolute Return Fund as of Sept. 30, according to a statement on its website. Photographer: Tomohiro Ohsumi/Bloomberg

Eaton Vance Management, which oversees $198 billion, estimates South Korea’s won is 15 to 20 percent undervalued, making the nation’s bonds attractive on prospects the currency will appreciate.

The won has strengthened 4.4 percent this year, the third-best performance among Asia’s 11 most-used currencies, and reached an 11-month high of 1,102.50 per dollar last week. South Korea’s improving trade surplus and better economic growth prospects than developed countries suggest the currency is weaker than it should be, according to Eric Stein, a portfolio manager for Boston-based Eaton Vance. The central bank this month raised its 2012 projection for the excess on the current account to $34 billion, having forecast $20 billion in July.

“The Korean won is so structurally undervalued considering the strong current-account surplus, and that keeps me wanting to invest,” Stein said in an Oct. 18 phone interview. “Officials still seem to be somewhat concerned about inflation. For a country that imports so much oil, the central bank may let the currency appreciate to keep imported inflation in check.”

Won-denominated assets accounted for 3.99 percent of the $6.5 billion Eaton Vance Global Macro Absolute Return Fund as of Sept. 30, according to a statement on its website. The fund returned 4.8 percent this year, outperforming 62 percent of its peers, data compiled by Bloomberg show. India’s rupee had the largest share at 7.69 percent. The firm’s Korean investments mainly consist of short-term central bank notes, Stein said. He declined to say whether he is adding to those holdings.

South Korea’s one-year central bank bonds yield 2.82 percent, compared with 0.12 percent for similar-maturity government debt in Japan and 0.18 percent for U.S. Treasuries, according to data compiled by Bloomberg. India’s notes due in a year yield 7.97 percent.

‘Smoothing’ Intervention

South Korea’s inflation will probably accelerate to 2.7 percent in 2013 from 2.3 percent this year, the central bank said in an Oct. 11 report. Finance Minister Bahk Jae Wan said in an interview with Bloomberg News on Oct. 9 that the government “shouldn’t intervene” in exchange rates, while reiterating the administration’s policy of implementing “smoothing” operations to limit volatility.

An overall appreciation trend in Asian currencies will make Korean policy makers more tolerant of won gains, Stein said. The Singapore dollar has advanced 6.3 percent so far this year, the Philippine peso rose 5.9 percent and Malaysia’s ringgit 3.8 percent, according to data compiled by Bloomberg.

South Korea’s economic growth prospects and relatively low sovereign debt are also supporting the won, according to Eaton Vance. The currency ended today at 1,104.25 per dollar and the median forecast of analysts surveyed by Bloomberg is for it to strengthen 1.8 percent to 1,085 by the end of September 2013.

‘Slowly But Surely’

“The Korean won is probably undervalued by 15 to 20 percent,” Stein said. “I don’t think the Bank of Korea would want to see rapid strength and it can be interrupted by global risk and Korea-specific factors, but it will slowly but surely continue to appreciate.”

Asia’s fourth-largest economy will expand 2.4 percent this year and 3.2 percent in 2013, the central bank predicts. Growth rates of 2 percent and 1.2 percent are projected for the U.S. and Japan in 2013, according to the median estimates of economists surveyed by Bloomberg. South Korea’s debt was equivalent to 34 percent of gross domestic product at the end of 2011, less than comparable levels of 212 percent for Japan and 68 percent for the U.S., data compiled by Bloomberg show.

December Election

The December presidential election in South Korea may give a lift to both the economy and the won, Stein said. The three leading candidates are pledging greater regulation and oversight on chaebols, the family-run conglomerates that account for most of South Korea’s exports.

“If the new government did things like chaebol reforms, that could actually be good for the economy,” Stein said. “Not that they will or should break up the chaebols, but if on the margin they can start policies that make it easier for other companies to compete, it could be better for the long-term growth potential of Korea.”

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