Foreigners Sell Most Korean Stocks Since May on Yen, Tension

International investors sold the most South Korean equities in 10 months in March amid concerns the nation’s exporters will lose market share to Japanese rivals and as tension with North Korea rose.

Foreign funds unloaded a net 2.6 trillion won ($2.3 billion) of Kospi index shares last month, the most since May when they dumped 3.7 trillion won, Korea Exchange Inc. data show. Purchases by domestic institutional and retail investors helped the gauge trim its monthly loss to 1.1 percent. The Kospi fell 0.5 percent today after North Korea said it will restart facilities at a nuclear site shut by a 2007 disarmament accord.

Global funds have reduced their holdings of South Korean equities as concerns deepened a weaker yen would give Japanese electronics and car makers an advantage over Korean producers. Vanguard Group Inc.’s decision to drop the country’s shares from its emerging-market exchange-traded fund also spurred sales. The outflows present an opportunity to add stocks cheaply, according to UBS Wealth Management.

“Undoubtedly, market sentiment on South Korea is not positive at the moment, given the continued weakness of the yen and the tensions with North Korea,” Kelvin Tay, the Singapore-based chief investment officer for the southern Asia-Pacific region at the wealth management unit of UBS AG, wrote in an e-mail yesterday. “But we view this as an opportunity to accumulate given the attractive valuations and the likely fiscal stimulus from the Korean government.”

Samsung, Posco

The Kospi trades at 9.2 times 12-month projected profit, a 51 percent discount versus the Nikkei 225 Stock Average’s 18.5 times, data compiled by Bloomberg show. The discount was at 54 percent on March 21, which was the biggest since May 2010, the data show. The MSCI Emerging Markets Index trades at 10.5 times profit.

Foreign ownership of Samsung Electronics Co., South Korea’s largest company by market value, fell to 49.6 percent in March, the lowest level since June, while holdings for Posco fell to the lowest since September, exchange data showed.

The yen weakened to a four-year low against the won on March 8 as Japanese Prime Minister Shinzo Abe called for more monetary easing to end deflation, making the nation’s exporters more competitive versus South Korean rivals. While Japan’s currency has gained 4.9 percent since then, Mark Mobius, executive chairman of Templeton Emerging Markets Group, said last month investors need to watch the won “very carefully” to see if it strengthens versus the yen.

Nuclear Threats

South Korean exports grew less than forecast last month as improving global demand for the country’s electronics and cars was tempered by the weaker yen. Overseas shipments rose 0.4 percent in March from a year earlier, after an 8.6 percent drop in February, the Ministry of Trade, Industry and Energy said yesterday. The median estimate in a Bloomberg News economist survey was for a 1.8 percent gain.

Tensions with North Korea have risen since the communist nation detonated a nuclear device in February in defiance of global sanctions. The regime led by Kim Jong Un cut off a military hot line with the South last month, put artillery forces on high alert, threatened pre-emptive nuclear strikes, and went on to say it’s in a “state of war” with the South.

Credit Suisse Group AG recommended an “overweight” stance on South Korean equities, analysts led by Sakthi Siva wrote in a March 25 report. The market is under-owned by foreign investors and the country is poised to benefit from a U.S. economic recovery, they said.

Vanguard ETF

Overseas investors have sold a net $1.9 billion worth of South Korean equities this year through March 29, the most of 10 Asian markets tracked by Bloomberg. That compares with a net $37 billion purchases through March 22 in Japan, the data show.

International investors also pulled their money in March as Vanguard decided to have its emerging markets exchange-traded fund track an index compiled by FTSE Group, which classifies South Korea as a developed market. The move was estimated by Barclays Plc in a Feb. 4 report to lead to $9 billion of outflows from Korean stocks in the first quarter.

Inflows by local investors are likely to make up for foreign selling toward the second half of this year, Barclays analysts led by Chanik Park wrote in a March 25 note, saying they are turning more “positive” on Korean equities. Expected fiscal stimulus by the government should improve local investors’ sentiment, the analysts wrote.

Domestic institutional investors bought a net 1.6 trillion won worth of shares in the Kospi from mid-March to the end of the month, while retail investors purchased 831 billion won, Korea Exchange data show.

Tax Breaks

South Korea announced on March 28 it will unveil a stimulus package this month to revive the economy after cutting its growth forecast for the second time in four months. The country said yesterday it will give tax breaks to home buyers and cut borrowing costs as the government seeks to revive home sales that tumbled to the lowest level since 2006.

“The expected pump-priming policy from the new government will help support domestic demand,” Im Jeong Jae, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management Co., which oversees about $29 billion, said by phone on March 28. “I believe South Korean markets will be able to outperform, catching up with gains in other markets.”

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