Kospi Losses Drive Pensions to U.S. as Bonds Lag: Korea MarketsJiyeun Lee and Sharon Cho
South Korea’s biggest pension funds are cutting holdings of local debt to buy stocks in the U.S. and Europe, saying the days when the Asian nation could be counted on to outperform developed markets are in the past.
Both Korea Teachers’ Pension and Government Employees Pension Service plan to reduce domestic notes to below 50 percent of assets in 2014 and add developed-world equities, managers of the funds say. South Korea’s government bonds returned 1.3 percent this year, trailing all Asian markets except the Philippines, and the won slid 0.8 percent versus the dollar, data compiled by Bloomberg show. The Kospi stock index fell 1 percent, while the MSCI World Index rose 0.8 percent.
Selling by public pension funds, which together manage the equivalent of $416 billion, will act as a drag on debt markets in Asia’s fourth-largest economy, Hana Daetoo Securities Co. said. Goldman Sachs Group Inc. recommended at the end of last year that investors cut allocations in developing nations by a third, forecasting “significant underperformance” for stocks, bonds and currencies over the next decade.
“The days when you could get 7 percent or 8 percent returns just by investing in Korea have gone,” Kim Youngsung, the Seoul-based head of overseas investment team at Government Employees Pension, said in a March 27 interview. “We’re expecting improvement in the U.S. and European economies to support equity inflows to developed markets, and plan to capitalize on the trend.”
Domestic bond weightings at Government Employees Pension, which manages 4 trillion won ($3.8 billion), will be lowered to 44.1 percent this year from 51.6 percent in 2013 and overseas assets are set to increase to 12 percent from 4.3 percent, according to Kim.
Teachers’ Pension, South Korea’s second-biggest public retirement fund, plans to cut local debt holdings to 47.4 percent of its 11.5 trillion won assets from 52.6 percent last year, while increasing investment in global stocks, debt and alternative assets to 10 percent from 6 percent, Chief Investment Officer Park Min Ho said in a March 25 interview.
“We expect the global economy to gradually recover this year starting in the U.S., then other developed countries, and then eventually emerging markets,” Park said. “In the first half, we see merits in European and U.S. stocks, but think Europe is better in terms of valuation.”
The Standard & Poor’s 500 Index of U.S. equities climbed 1.3 percent this year, hitting a record high last month, while the Stoxx Europe 600 Index rose 1.8 percent. The S&P 500 was valued at 15 times estimated earnings for the next 12 months and the Stoxx Europe 600 at 14 times, according to data compiled by Bloomberg. That compares with 10 times for the Kospi, the benchmark gauge of South Korea’s $1.2 trillion stock market.
Economic growth in the U.S. will quicken to 2.7 percent this year from 1.9 percent in 2013, while gross domestic product in the euro area is expected to increase for the first time since 2011, according to the median estimates in Bloomberg surveys. The Bank of Korea forecast in a Jan. 9 report that South Korea’s economy will expand 3.8 percent, the fastest pace since 2010.
National Pension Service, South Korea’s biggest investor with about $400 billion of assets, formed a team to focus on overseas investment strategy, it said March 24. It aims to pare domestic bond holdings to 54.2 percent this year from 56.1 percent in 2013, and increase the weighting of overseas stocks to 10.5 percent from 10.4 percent, the Ministry of Health and Welfare, which oversees the pension provider, said in June.
Pension funds are not alone in looking to allocate more cash abroad. Korea Investment Corp., which is the nation’s sovereign wealth fund, and state-run Korea Development Bank are among members of a committee formed to share overseas investment information, Yoon Tae Sik, director at the international financial policy division of the Finance Ministry, said in a March 27 phone interview. Local financial markets are “saturated,” Yoon said, adding that the committee will hold bi-monthly meetings from April.
“Increases in public funds’ assets are forcing them to invest overseas for portfolio diversification, but this needs to be accompanied by improved risk control and more professional asset management,” said Lee Hwi Jung, a Seoul-based researcher for Hana Institute of Finance.
National Pension Service’s assets grew 8.9 percent in 2013 to 427 trillion won as of end-December. Those at Teachers’ Pension are expected to increase by about 1 trillion won a year, according to Do Byung Won, the head of investment strategy at the pension provider.
Teachers’ Pension delivered a 3.94 percent return last year and is targeting 5.09 percent for 2014, Park said. South Korea’s sovereign bonds handed investors a total return of 1.15 percent last year in won terms, the Kospi index delivered 1.95 percent and the MSCI World Index of shares in developed nations made 25.8 percent, according to data compiled by Bloomberg. The currency strengthened 1.4 percent versus the dollar.
Pension funds pulling money from South Korea’s debt market will weigh on bond prices, said Shin Dong Jun, chief strategist at Hana Daetoo Securities in Seoul.
Goldman Sachs advised clients to cut their emerging-market allocation to 6 percent from 9 percent, citing the lack of economic reforms to improve growth, CNBC reported on Dec. 22. Morgan Stanley recommended investors reduce holdings of developing-nation currencies and bonds on Dec. 3.
Bonds are seen sliding across the world’s biggest economies this year as the U.S. recovery prompts the Federal Reserve to rein in monetary stimulus. The central bank cut its monthly debt purchases to $55 billion in March, lowering the amount by $10 billion for the third policy meeting in a row.
Ten-year yields on U.S. Treasuries are forecast to increase 60 basis points to 3.34 percent by the end of 2014 and those on South Korea’s debt are seen rising 36 basis points to 3.90 percent, based on the median forecasts in Bloomberg surveys.
The Bank of Korea is also expected to raise its benchmark interest rate, currently 2.5 percent, at least once in 2014, according to 13 of 26 economists in a separate survey. Two predicted a cut while the rest saw no change.
“The U.S. tapering will put upward pressure on bond yields, making the assets less attractive,” said Park at Teachers’ Pension. “We’re keeping bond durations in our portfolio at 2.5 years, below the market average of 3.5 years, and taking care to choose sectors in corporate bonds to prepare for rate increases.”