Kospi hit by ‘perfect storm’ of yen, Apple, Vanguard

Finance

Published: 27 Jan. 2013, 23:55

Kospi hit by ‘perfect storm’ of yen, Apple, Vanguard

A panel at Korea Exchange Bank’s dealing room in Euljiro,?central Seoul, shows the Kospi closing at 1,946.69 on Friday, down 0.91 percent from the previous day due to poor corporate earnings among automakers and IT companies. The Korean won ended at 1,074.5 won against the greenback, down 5.8 won. [YONHAP]

Korean stock markets, which were buoyed by a last-minute compromise on the U.S. fiscal cliff at the start of the year, now show a disappointing performance compared to other major markets including those of the United States, Japan and China.

According to KDB Daewoo Securities last week, Korea ranks 70th out of 78 countries in terms of its stock index growth this year after it slipped 0.5 percent on-year.

The eight other countries that ranked at the bottom of the list include Malaysia (minus 0.7 percent), Bangladesh (minus 1.2 percent) and Pakistan (minus 1.8 percent).

Market observers blame three international shocks for the Kospi’s faltering: Vanguard Group’s decision to switch indexes, the weakening Japanese yen and Apple’s poor fourth-quarter sales.

The Kospi closed at 1946.69 on Friday, down 0.91 percent from Thursday.

Vanguard invasion

Market observers say U.S.-based Vanguard Group’s recent moves to switch to a benchmark index that exclude Seoul shares sent shockwaves through the local stock markets.

The world’s second-largest asset management company announced in October it would be changing the benchmark used to measure the performance of its emerging-markets stock index funds to the FTSE from the MSCI this year.

The FTSE Emerging Index classifies Korea as a developed market and fund managers of Vanguard’s emerging stock index funds must sell its holdings of Korean stocks to comply with the FTSE’s classification.

Vanguard began dumping its Korean shares from Jan. 10 and this has prompted a selling-off of Korean stocks.

“Vanguard is expected to sell an average 480 billion won [$447 million] of Korean shares per week over six months,” said Ahn Nam-ki, a research fellow at the Korea Center for International Finance. “Since Jan. 10, foreign investors sold off a combined 530 billion won of Korean shares for six straight days.

Given that some other Asian markets experienced foreign investors’ selling rally over the same period, this is a clear sign that the Kospi, too, is experiencing the so-called Vanguard effect.”

The center said Vanguard has invested a combined $14.3 billion in Korean shares for its overseas equity funds as of end of 2012, and it has invested $11.3 billion out of this in emerging-market funds.

Woori Investment and Securities said shares of Korean exporters held by Vanguard include Samsung Electronics, Hyundai Motor, Posco, Hyundai Mobis, and SK Hynix.

In the banking sector, the U.S. firm holds shares of Shinhan Financial Group as well as KB Financial Group.

Japanese yen not helping

The weakening yen against the won is not only hurting Korean exporters, as many compete with the Japanese in fields such as home appliances, IT and automobiles, but is limiting the Kospi’s growth because Hyundai Motor has the second-highest market cap on the bourse after Samsung Electronics.

Shares of Hyundai Motor and Kia Motors have slipped between two and four percent this year. Hyundai Motor fell from 216,000 won on Jan. 2 to 201,000 won on Friday due to its disappointing Q4 earnings results announced Thursday.

Hyundai said it raised 1.83 trillion won in operating profit in the fourth quarter, down 11.7 percent on-year.

The earnings results were far below the 2.11 trillion won estimated by analysts at securities firms.

The Bank of Korea said the Korean currency’s appreciation against the yen hit a 14-year high last year.

The central bank said on Monday that the won reached 1,238.3 won per 100 yen as of the end of 2012, up 19.6 percent on-year. The growth is steeper than won-dollar exchange rate as the won appreciated 7.6 percent last year, it added.

BOK Governor Kim Choong-soo said earlier this month that the central bank will “actively cope with any increases in foreign exchange volatility spurred by Japan’s weakening of the yen, by adopting a smoothing operation.”

The won closed at 1187.16 won against the yen yesterday.

Apple shock

Market observers say Apple’s disappointing earnings results Wednesday (U.S. time) may be good news for Samsung Electronics, which competes with it on smartphones and tablet PCs, but not so for other Korean IT manufacturers.

Apple reported a net profit of $13.08 billion from October to December, slightly up from $13.06 billion a year earlier, but on a per-share basis, its earnings edged down to $13.81 from $13.87. The growth rate of revenue and net profit is the lowest since 2009. It posted $54.5 billion in revenue, up from $46.3 billion.

Apple said it shipped a record 47.8 million iPhones in the quarter, up 29 percent on-year, but this came in below analysts’ expectations of 50 million.

The news hurt the share prices of Korean IT firms like LG Display and LG Innotek, which supply LCD panels for the iPhone and iPad maker and rely on it as a key revenue source.

LG Display ended at 27,850 won yesterday, down 2.45 percent.
“Some 70 percent of LG Display’s overall profits are generated from its ties with Apple,” said Park Young-joo, an analyst at Woori Investment and Securities. “If Apple’s share of the smartphone market goes down, it will negatively affect LG Display’s fundamentals.”

By Kim Mi-ju [mijukim@joongang.co.kr]