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Record-long selloff ends after rating upgrade

Sept 23,2015
The longest selloff of Korean stocks in seven years ended the day after the nation recovered the sovereign rating it had enjoyed before the 1997 Asian crisis. That was no coincidence.

Franklin Templeton Investment Trust Management and NH Investment Securities said that Standard & Poor’s upgrade for Asia’s fourth-largest economy was an acknowledgment that the country is in a stronger position to withstand any emerging- market selloff than in the past. Foreign investors turned net buyers of stocks on Sept. 16, after 29 consecutive days of net selling that was the longest run since July 2008.

“After the ratings upgrade, the currency stabilized and foreigners who had been selling stocks returned,” said Kang Jae-joon, head of equity at Templeton in Seoul. “It doesn’t look like a good strategy to leave Korean markets amid concerns about emerging economies. Korea’s relative stability has increased and there will be many opportunities in equities.”

The won has delivered a total return of 1.8 percent to fixed-income investors in the past month, Asia’s best performance, and the nation’s debt is set for a second month of inflows. Kim Eng Tan, head of Asia sovereign ratings at S&P, said in a webcast after the Sept. 15 upgrade that the growth outlook is positive compared with most developed nations, and it would take a significant slowdown in China to impact Korea’s credit metrics.

S&P’s Tan said that while Korea’s performance is likely to diminish versus its peers over the next three to five years, that won’t be a concern unless growth drops below 1 percent over a sustained period. Asia’s fourth-largest economy grew 2.2 percent from a year earlier in the three months ended June, the least in 10 quarters, and the nation’s exports contracted in each of the first eight months.

While global funds sold a net $1 billion of Korean stocks this month, they bought $513 million in the three days through Sept. 18, data compiled by Bloomberg show. The nation’s debt saw net inflows of $1.1 billion in September even as foreigners pulled out from India, Malaysia and Thailand.

S&P raised the sovereign rating one level to AA-, joining Moody’s Investors Service and Fitch Ratings in ranking the debt at the fourth-highest investment grade on Sept. 15. Moody’s and Fitch upgraded their assessment in 2012. S&P had cut its ratings to as low as B+, below the investment grade, in 1998 from AA- in 1997.

Credit-default swaps insuring Korea’s bonds against non-payment fell to 60.5 basis points on Sept. 17, the lowest level since Aug. 13, according to data provider CMA. The won rose 2 percent to 1,162.80 in the three days through Sept. 18, before retreating to 1,176.18 as of 11:10 a.m. in Seoul Tuesday. The yield for three-year government bonds declined to a record 1.62 percent on Monday, Korea Exchange prices show.

“The ratings upgrade will clear most of the concerns about outflows, supporting bond yields at a low level,” said Park Jong-youn, a fixed-income analyst at NH Securities. “It establishes Korea’s semi-haven appeal among emerging markets, which means it will see relatively smaller outflows amid a selloff in the region and faster inflows in times of stability.”

Park expects the three-year yield to decline to 1.55 percent by the year-end. JPMorgan Chase & Co. predicts a drop below 1.60 percent in the period, according to Lim Ji Won, a Seoul-based economist at the bank.

Yuanta Securities Korea forecasts a rise to 1.80 percent, citing uncertainties like the timing of the Fed’s rate increase and that S&P was only matching the rating of the other big firms.

“The ratings upgrade could create room for rate cuts by reducing the risk of capital outflow,” said Chang Jae-chul, an economist at Citigroup Inc. in Seoul. “Any negative impact from adverse developments in global financial markets will be felt less in Korea when downside risks emerge.” Bloomberg




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