South Korean equity valuations, dragged lower by rising tensions with North Korea and a weaker yen, are attractive amid “resilient” corporate earnings, according to Templeton Emerging Markets Group’s Mark Mobius.
No large-scale investor withdrawal is expected as most international investors are “well aware” of the history of the North’s aggression toward its southern neighbor, Mobius, Templeton Emerging Markets’ executive chairman, wrote in a blog posting dated yesterday. Government stimulus measures could boost economic growth and equities once tensions ease, he wrote.
The benchmark Kospi index has fallen 4.9 percent this year, giving the measure its biggest valuation discount to the MSCI Asia Pacific Index in six years, data compiled by Bloomberg show. The MSCI gauge has climbed 4.9 percent in 2013.
“As we are long-time emerging markets investors, tensions on the Korean peninsula are not news to us,” Mobius wrote. “During crisis periods, market weakness can be viewed as potential buying opportunities, which could be the case in South Korea.”
The Kospi fell 1.2 percent to 1,900.06 at the close in Seoul today. The 764-stock index is valued at 1 time net assets, versus 1.5 times for the MSCI Asia Pacific Index, the biggest discount on a monthly basis since March 2007, according to data compiled by Bloomberg.
South Korean stocks have lagged behind regional equities as North Korea cut off a military hotline, declared a state of war with the South, threatened pre-emptive nuclear strikes and prevented South Korean workers from entering a jointly run industrial park.
South Korea on April 16 unveiled a 17.3 trillion won ($1.5 billion) supplementary budget to support exporters pressured by a weaker Japanese currency and revive an economy that grew last year at the slowest pace since 2009. The yen has weakened about 18 percent against the won in the past six months as Japan’s central bank announced unprecedented monetary stimulus, hurting the competitiveness of Korean exporters.
International investors have sold a net 2.6 trillion won of Kospi index stocks after March 26, when Kim Jong Un’s regime announced its highest combat level. Domestic institutions bought a net 1.8 trillion won.
“Not all that much is known about Kim Jong Un,” Mobius said. “This does create some additional uncertainty and there is a risk that the regime will undertake some type of military action, launching missiles or nuclear tests.”
U.S. Secretary of State John Kerry ended a trip to Seoul, Beijing and Tokyo this week by calling for dialogue with Kim’s regime, while saying a nuclear-armed North Korea was unacceptable. North Korea’s state-run news agency said April 16 talks with the U.S. are possible once it has sufficient nuclear weapons to deter an attack.
Mobius’s views on valuations align with South Korea’s biggest investors. Stock declines are “an opportunity to add blue chips at bargain prices,” the National Pension Service, which had about $350 billion in assets as of January, said in an April 11 e-mail.
“We believe there are reasons to be optimistic about South Korea’s long-term investment potential,” Mobius wrote. “Right now we generally view valuations in Korea as attractive.”