JPMorgan Picks Stocks Over Debt as Goldman Upbeat: Korea Markets
South Korean stocks are beating bonds by the most in six quarters as foreign investors buy shares at the fastest pace on record and accelerating global economic growth increases the chances of monetary tightening.
The Kospi (KOSPI) index has added 7 percent since the end of June, compared with a gain of less than 0.1 percent in Bank of America Corp.’s index tracking the nation’s sovereign debt, the biggest gap since the first quarter of 2012. While overseas money managers withdrew $1.9 billion from debt in August, equities lured inflows in the past five weeks, including a record $3.6 billion last week. The Kospi is valued at 1.1 times net assets, a 47 percent discount versus the MSCI All-Country World Index.
JPMorgan Asset Management and Goldman Sachs Group Inc. say shares will keep outperforming bonds as the fastest export growth in seven months boosts profit at Kospi companies, which get about 40 percent of their sales overseas. Economists surveyed by Bloomberg predict the Federal Reserve will announce a reduction in its bond-purchase program on Sept. 18, while Goldman Sachs says the Bank of Korea will increase interest rates in the second half of 2014.
“We bought more Korean stocks in August,” Grace Tam, a Hong Kong-based global market strategist at JPMorgan Asset, which manages about $1.5 trillion, said in a telephone interview on Sept. 11. “Rotation from bonds to equities will go on.”
International investors have poured a net $7.2 billion into South Korean shares in the past five weeks as data showed the economy expanded 1.1 percent in the three months through June from the previous quarter, while exports jumped at a quicker-than-estimated 7.7 percent rate in August. Foreigners bought a net $165.4 million worth of Kospi shares as of 10:37 a.m. in Seoul today, extending net purchases to 17 consecutive days. The benchmark Kospi index added 0.9 percent to 2011.96.
Samsung Electronics Co. (005930), the world’s biggest smartphone maker, attracted $2.05 billion of inflows during the period and SK Hynix Inc. (000660), the second-largest computer-memory chipmaker, lured $573 million, according to data compiled by Bloomberg.
The Kospi advanced 2 percent last week to 1,994.32, extending its rally from an 11-month low on June 25 to 12 percent. The Bank of America bond index returned 0.8 percent last week and its yield slipped to 3.19 percent, within 0.01 percentage point of the lowest level since July 24. The won strengthened 0.6 percent to 1,086.88 per dollar, paring this year’s drop to 2.1 percent. The cost of protecting the nation’s debt against nonpayment using credit default swaps rose to 75 basis points from 73.5, according to CMA.
The benchmark equity index will probably climb to as high as 2,200 by the middle of next year, a 10 percent gain from its closing level on Sept. 13, according to Kwon Goohoon, a Seoul-based economist for Goldman Sachs.
Earnings before interest, taxes, depreciation and amortization at Kospi index companies will probably climb 15 percent in the next 12 months, versus 10 percent for the MSCI All-Country index, according analyst estimates compiled by Bloomberg.
“Corporate earnings will see better growth, most likely from the fourth quarter, as global economies including Korea are turning around,” Kwon said in a phone interview.
Reduced stimulus by the Fed will weigh on most emerging-market assets, including South Korean equities, Vivek Misra, a Bangalore-based Asia equity strategist at Societe Generale SA, said in a telephone interview on Sept. 13. The Kospi may end the year at 1,900, about 5 percent below the closing level last week, before rallying in 2014, Misra said.
The U.S. central bank will cut monthly Treasury purchases to $35 billion from $45 billion while maintaining mortgage-bond buying at $40 billion, according to the median of 34 responses in a Bloomberg News survey of economists on Sept. 6. That pace was unchanged from an Aug. 9-13 poll, as was a projection that the program will end in June. The Kospi has rallied 106 percent since the Fed’s first round of bond-buying in 2008.
The gains in South Korean stocks this quarter have reduced dividend yields on the Kospi to the lowest levels since April 2012 compared with the yield on debt, according to data compiled by Bloomberg. The equity gauge has a payout of 1.17 percent, versus the 3.57 percent yield on the nation’s 10-year government bonds. The gap of 2.4 percent compares with the 16-month low of 2.5 percent on Aug. 19.
Investors will continue favoring equities over bonds as interest rates rise, said Kim Jiun, a Seoul-based analyst at Shinhan Investment Corp. The foreign withdrawals from debt in August were the first in seven months, according to the Financial Supervisory Service.
While the Bank of Korea held its key interest rate at 2.5 percent for a fourth straight month last week, Goldman Sachs estimates the central bank will increase the rate to 3 percent by the end of 2014. The economy will expand 2.8 percent in 2013 and 4 percent next year, which would be the fastest pace since 2010, according to central bank forecasts.
“We have been holding a conservative view on the bond market and have moved to bonds with shorter maturity,” Kim Ki Hyun, head of the fixed-income investment division at Woori Asset Management Co., said by phone from Seoul.
Quicker global growth is boosting the sales outlook for South Korean companies, according to BlackRock Inc., the world’s largest money manager. Service industries in the U.S. expanded in August at the fastest pace in almost eight years as a pickup in demand encouraged companies to increase hiring, the Institute for Supply Management said on Sept. 5.
“Korean exporters are benefiting from global growth,” Marc Desmidt, the head of alpha strategies for Asia Pacific at BlackRock, which oversees about $3.8 trillion, said in a Sept. 11 interview on Bloomberg Television. “If that continues that will be very good for them.”