Union Investment Adds Won Amid Rally as Western Stays Overweight

The won is strengthening at the fastest pace since 2011 as improving economies in the U.S. and Europe brighten the outlook for South Korea’s exports, spurring demand for the Asian nation’s assets.

The currency gained 4.4 percent in the last three weeks, its best performance for a period of that length since October 2011, as overseas investors poured 4.7 trillion won ($4.5 billion) into the nation’s equities and bonds. Union Investment Privatfonds GmbH said it bought into the rally, predicting an advance toward 1,000 per dollar in coming months, while Western Asset Management Co. kept an “overweight” stance. The currency retreated 0.2 percent so far this week to 1,037.18.

South Korea’s current-account surplus widened to a record $79.88 billion last year and the Bank of Korea on April 10 raised its 2014 projection to $68 billion from $55 billion. JPMorgan Chase & Co. recommends investors hold more of the nation’s equities than benchmarks indicate, while Morgan Stanley said this month the won may appreciate to 950 per dollar.

“The current-account surplus makes Korea well positioned for improving world trade volumes,” Christian Wildmann, a fixed-income fund manager at Union Investment Privatfonds in Frankfurt, part of Germany’s Union Investment Group overseeing about 206 billion euros ($285 billion), said in an April 14 e-mail interview. “This, with the better sentiment towards emerging-market equities and the corresponding portfolio inflows to Korea make the won one of our favorite picks.”

Samsung, Hyundai

South Korea’s trade ministry forecast on Jan. 1 that exports will expand 6.4 percent in 2014, which would be the biggest gain since 2011. The nation is home to Samsung Electronics Co., the world’s biggest producer of smart phones, and Hyundai Motor Group, the fourth largest carmaker.

The current-account surplus coupled with benign inflation are reasons Western Asset is more heavily invested in the won than benchmarks suggest, Singapore-based portfolio analyst Kim Wontae said in an April 14 e-mail interview.

Exports increased 5.1 percent in March from a year earlier, after a 1.4 percent gain in February. Consumer prices increased 1.3 percent, compared with an average gain of 2.5 percent in the past five years. Only Singapore has slower inflation among 17 Asia-Pacific economies tracked by Bloomberg.

The won appreciated 2.7 percent this month, the biggest gain among the 11 most-traded Asian currencies, after posting a 1.4 percent loss in the first quarter, data compiled by Bloomberg show. It touched 1,031.55 per dollar on April 10, the strongest level since August 2008. The Kospi index of shares rose 0.9 percent since March 31, more than the 0.7 percent gain in the MSCI Asia Pacific Index.

Won Options

The premium for three-month won put options granting the right to sell the currency on April 11 was 1.36 percentage points over calls, which allow for purchases, the least since January 2013, according to data compiled by Bloomberg.

Neuberger Berman Group LLC, which oversees $242 billion, reduced its won positions during the recent rally, according to Prashant Singh, lead portfolio manager for Asia local emerging-market debt in Singapore.

“We have tactically pared our overweight position on the won and moved back to neutral in the past couple of weeks,” Singh said in an April 15 phone interview. “In the near term we don’t expect the won to appreciate much more, but in the medium to long term we are relatively constructive.” Neuberger sees the won trading around 1,020 to 1,030 per dollar by year-end, he said.

Global Brands

Hyundai Motor Co. and its affiliate Kia Motors Corp. based their 2014 business plans on an average exchange rate of 1,050 won per dollar, separate responses from the carmakers showed. Hyundai is seeking to offset losses from the exchange rate by boosting sales and average selling prices, the company said in an e-mailed response to Bloomberg News on April 10.

The current won level is not a “big problem” for South Korea’s exporters, Scott Seo, head of equity research at JPMorgan in Seoul, said by phone on April 11. That view was echoed by Fidelity Worldwide Investment.

“Korean companies emerged as global brands not just because of currency depreciation or gains, but because they have real market share gains from product improvisation, increased spend on research and development, and real product innovation,” Medha Samant, a Hong Kong-based investment director at Fidelity, said by phone on April 11.

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