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JPMorgan Buys Korean Stocks Trading at 2009 Valuation

JPMorgan Buys Cheapest Korean Stocks Since 2009 as Profits Rise
International investors sold a combined $14.3 billion of equities last month in the nine Asian emerging markets tracked by Bloomberg, led by South Korean outflows of $4.5 billion, which were the largest since August 2011. Photographer: SeongJoon Cho/Bloomberg

The lowest South Korean equity valuations since 2009 are spurring JPMorgan Asset Management and Charlemagne Capital Ltd. to buy as earnings projections climb to a record and a weaker won boosts exporters.

The MSCI Korea Index lost 7.2 percent last month as speculation of reduced U.S. stimulus sparked outflows from emerging-market stocks. The Korea gauge fell to 1 times net assets, the lowest valuation since March 2009, even as analysts predict profits will rise 36 percent in the next 12 months to an all-time high. That compares with 16 percent for the MSCI Emerging Markets Index, data compiled by Bloomberg show.

While international investors sold the most South Korean shares in almost two years in June and economic growth held at the slowest pace since 2009, JPMorgan Asset Management says exporters will benefit as the won slips from a more than four-year high against the yen. Charlemagne’s Julian Mayo bought Samsung Electronics Co. shares last month as the company’s price-to-book ratio declined to an 18-month low.

“Long-term investors should be buying Korean stocks,” Mayo, who oversees $2.7 billion in emerging markets assets as Charlemagne’s London-based co-chief investment officer, said in a July 9 interview in Seoul. “If companies we like become cheaper, I expect we’ll buy more.”

The last time the MSCI Korea Index’s valuation reached these levels four years ago, the gauge advanced more than 50 percent in six months. It’s valued at a 28 percent discount versus the MSCI Emerging Markets Index, which trades for 1.4 times net assets, according to data compiled by Bloomberg.

Fund Outflows

The emerging markets gauge tumbled 13 percent from May 22 to yesterday after Federal Reserve Chairman Ben S. Bernanke said policy makers may scale back bond purchases if the U.S. labor market improves. The MSCI Korea gauge dropped 9 percent, while the nation’s benchmark Kospi index 8.2 percent. MSCI’s index lost 0.2 percent today and the Kospi sank 0.3 percent.

South Korea’s open economy makes it vulnerable to “external shock,” according to Yoojeong Oh, a Singapore-based money manager at Aberdeen Asset Management Plc. Client withdrawals prevented Aberdeen from making new investments in South Korean stocks, Oh said by phone on July 3.

International investors sold a combined $14.3 billion of equities last month in the nine Asian emerging markets tracked by Bloomberg, led by South Korean outflows of $4.5 billion, which were the largest since August 2011. Foreigners pulled $615.4 million from the nation’s stocks this month as stronger-than-estimated U.S. jobs data boosted the case for the Fed to curb so-called quantitative easing.

Sustainable Growth

For South Korea, “just given the size and how open it is to foreign investments, it is susceptible,” Aberdeen’s Oh said. Her firm oversees about $315 billion.

The possibility of the Fed winding back stimulus signals U.S. economic growth is becoming more sustainable, according to Grace Tam, a Hong Kong-based global market strategist at JPMorgan Asset, which manages about $1.5 trillion.

“It’s going to benefit the Korean stock market,” especially electronics and auto exporters, Tam said by phone on July 5. “We have been buying South Korean shares selectively because they have had very deep corrections.” She declined to identify specific companies.

Exporters comprise more than 40 percent of the MSCI Korea index. Samsung Electronics, the world’s largest smartphone maker, represents 25 percent of the gauge, data compiled by Bloomberg show.

Kia Valuations

Shares of Samsung, based in the southern city of Suwon, sank 13 percent in June. While the company’s second-quarter earnings missed estimates, analysts surveyed by Bloomberg are still projecting third-quarter operating profit to reach a record 10.6 trillion won ($9.3 billion). The stock traded at 1.4 times net assets on July 8, the lowest since January 2012.

Charlemagne’s Mayo said his firm bought shares of Kia Motors Corp., an affiliate of Hyundai Motor Co., in recent months. Hyundai Motor’s shares trade for 6.1 times projected 12-month profit on July 10, while Kia is valued at a multiple of 6.2, data compiled by Bloomberg show. That’s at least 49 percent lower than Japan’s Toyota Motor Corp., the world’s largest automaker, which trades for 12.1 times.

Samsung Electronics’ shares gained 0.9 percent today, rising for a second day. Hyundai Motor climbed 0.7 percent, while Kia added 0.8 percent.

“Korea is a very attractive market,” Kelvin Tay, the Singapore-based chief investment officer for the southern Asia-Pacific region at UBS AG’s wealth management unit, wrote in a July 3 e-mail. “Earnings should improve from this point. The slower rate of depreciation of the yen should also help boost market sentiment on Korea.”

Economic Recovery

The won’s 4.2 percent decline since it settled at 9.221 against the yen on May 22, the strongest level since September 2008, has eased concerns about the competitiveness of South Korean exporters versus Japanese rivals. The won has strengthened 22 percent against the yen since the end of October as Japan pledged unprecedented monetary stimulus to bolster its economy.

A weaker won will help the South Korean economy recover in the second half, Goldman Sachs Group Inc. said in a July 4 report. South Korea’s first-quarter gross domestic product grew 1.5 percent, matching the previous three months’ pace, which was the slowest rate since the third quarter of 2009, according to Bank of Korea data.

South Korea offers a “very exciting new opportunity,” Samir Shah, an investment manager at London-based Advance Emerging Capital Ltd., wrote in a July 3 e-mail. “Valuations are relatively cheap. Furthermore, the currency has reversed against the yen. We see corporate earnings being revised upwards.”

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