Korean Stocks Drop Most in Asia as Pioneer Sells on Won Rise

South Korean stocks are tumbling at the fastest pace in Asia as the strengthening won curbs profits at the nation’s biggest exporters, causing international investors to sell the most shares since July.

The Kospi Index fell 3.7 percent in the month to yesterday as the MSCI Asia Pacific Index lost 0.2 percent. Samsung Electronics Co. was the biggest drag on the Kospi as the won reached a four-year high versus the yen, making the company’s mobile phones and televisions more expensive versus Japanese rivals such as Sony Corp. Foreigners withdrew a net $2 billion from South Korea since Jan. 4, data compiled by Bloomberg show.

While the Kospi’s retreat has dragged its valuation to the lowest level since June 2010 against the MSCI Asia Pacific Index, Pioneer Investments is selling. The manager of about $215 billion has turned bearish as Samsung predicted the stronger currency may cut operating profit by $2.8 billion this year and Hyundai Motor Co. reported a decline in fourth-quarter earnings because of the won’s appreciation.

“Foreign investors flocked out of Korea because of currency strength, especially against the yen,” Angelo Corbetta, the London-based head of Asian equity at Pioneer, wrote in an e-mail on Jan. 31. “This will result in a loss of market share.” Pioneer cut South Korean holdings to below their weighting in benchmark indexes at the end of 2012 and is still reducing positions, according to Corbetta.

Currency Impact

Bank Julius Baer & Co., which oversees $296 billion of client assets, may downgrade Korean shares to neutral, or equal to their weight in benchmark gauges, Pearlyn Wong, a Singapore-based investment analyst with the Swiss bank, said by phone on Jan. 29.

“We are looking at the impact of currency on performance,” Wong said.

The 30-day correlation between the won and the Kospi fell to a two-year low of 0.02 last month from as high as 0.76 in July, data compiled by Bloomberg show. A reading of 1 means prices are moving in tandem while zero indicates no relationship and minus 1 means they move in opposite directions.

The Korean currency has strengthened 24 percent against the yen in the past six months and appreciated 3.7 percent versus the dollar. The Kospi gained 2.9 percent in that time. The stock gauge added 0.1 percent to 1,940.26 as of 10:54 a.m. in Seoul today.

Investors may be shifting money to Japan from South Korea, Wong said. Japanese stocks lured $9.56 billion in net foreign purchases this year through Jan. 25, the most among 10 Asian markets tracked by Bloomberg, as Prime Minister Shinzo Abe pushed for a weaker currency and an increase in fiscal stimulus.

‘Large Crossover’

The Topix Index added 5.8 percent in the month to yesterday, while Sony climbed 50 percent amid optimism restructuring efforts and the yen’s depreciation will help end four years of losses for the electronics maker. Toyota Motor Corp., Japan’s biggest auto company, advanced 6.6 percent.

“The largest crossover between export nations in Asia is Korea versus Japan,” Markus Rosgen, Citigroup Inc.’s Hong Kong-based chief Asian strategist, said in a Jan. 31 interview. “With the yen now weaker, investors are concerned that Korean exporters may lose market share to the Japanese.”

Hyundai, South Korea’s biggest automaker, has declined 6.9 percent this year and Kia Motors Corp. slumped 9.7 percent. Hyundai said on Jan. 24 fourth-quarter net income sank 5.5 percent, while Kia reported a 51 percent slump in operating profit the next day.

Weak Recovery

Hyundai Motor Group, the group to which both automakers are affiliated, expects the won to strengthen more this year, Kia said in a Jan. 4 e-mail. Samsung forecast on Jan. 25 a slowdown in smartphone demand in developed markets in the first quarter.

Aberdeen Asset Management Plc, which manages $314.3 billion in client assets, is keeping its investment in Samsung shares, which have a 19 percent weighting in the Kospi index.

“Even with the won strength, Samsung has been able to continue growing sales,” Yoojeong Oh, a money manager at Aberdeen, wrote in an e-mail on Feb. 4.

Samsung will probably boost revenue by 14 percent this year and increase earnings by 18 percent, according to the average of more than 40 analysts’ estimates compiled by Bloomberg. That compares with projected profit growth of about 13 percent for the MSCI Asia Pacific index.

The company is valued at 7.5 times estimated 12-month earnings, down from a three-year average of 10 times, data compiled by Bloomberg show. The Kospi trades for 9.8 times projected profits, a 33 percent discount versus the MSCI gauge.

Vanguard ETF

A decision by Vanguard Group Inc. to drop South Korean stocks from its emerging markets exchange-traded fund could lead to $9 billion of outflows from equities in the first quarter, Barclays Plc said in a Feb. 4 note. Vanguard said Oct. 2 its $61 billion ETF would track an index compiled by FTSE Group, which classifies South Korea as a developed market, instead of MSCI Inc.’s gauge.

The International Monetary Fund is likely to pare its forecast for South Korea’s economic growth for 2013, following reduced estimates by the nation’s central bank on Jan. 11. The full-year expansion may be about 3 percent, compared with a 3.9 percent estimate in September last year, country mission chief Hoe Ee Khor said in an interview in Seoul last month.

“Korea is facing a more competitive environment,” Adrian Mowat, the chief Asian and emerging-market strategist at JPMorgan Chase & Co., said at a briefing in Manila on Feb. 1. “I am nervous about the exports sector.”

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