Asset managers jump on the Korea bandwagon

The lowest Korean equity valuations since 2009 are spurring JPMorgan Asset Management and Charlemagne Capital to buy as earnings projections climb to a record and a weaker won boosts exporters.

The MSCI Korea Index lost 7.2 percent last month as speculation of reduced U.S. stimulus sparked outflows from emerging-market stocks. The Korea gauge fell to 1 times net assets, the lowest valuation since March 2009, even as analysts predict profits will rise 36 percent in the next 12 months to an all-time high. That compares with 16 percent for the MSCI Emerging Markets Index.

While international investors sold the most Korean shares in almost two years in June and economic growth held at the slowest pace since 2009, JPMorgan Asset Management says exporters will benefit as the won slips from a more than four-year high against the yen. Charlemagne’s Julian Mayo bought Samsung Electronics shares last month as the company’s price-to-book ratio declined to an 18-month low.

“Long-term investors should be buying Korean stocks,” said Mayo, who oversees $2.7 billion in emerging markets assets as Charlemagne’s London-based co-chief investment officer. “If companies we like become cheaper, I expect we’ll buy more.”

The last time the MSCI Korea Index’s valuation reached these levels four years ago, the gauge advanced more than 50 percent in six months. It’s valued at a 28 percent discount versus the MSCI Emerging Markets Index, which trades for 1.4 times net assets.

The emerging markets gauge tumbled 13 percent from May 22 to Tuesday after Federal Reserve Chairman Ben S. Bernanke said policy makers may scale back bond purchases if the U.S. labor market improves. The MSCI Korea gauge dropped 9 percent, while the nation’s Kospi index slumped 8.2 percent.

Korea’s open economy makes it vulnerable to “external shock,” according to Yoojeong Oh, a Singapore-based money manager at Aberdeen Asset Management. Client withdrawals prevented Aberdeen from making new investments in Korean stocks, Oh said.

International investors sold a combined $14.3 billion of equities last month in the nine Asian emerging markets tracked by Bloomberg, led by Korean outflows of $4.5 billion, which were the largest since August 2011. Foreigners pulled $615.4 million from the nation’s stocks this month as stronger-than-estimated U.S. jobs data boosted the case for the Fed to curb so-called quantitative easing.

For Korea, “just given the size and how open it is to foreign investments, it is susceptible,” Aberdeen’s Oh said. The possibility of the Fed winding back stimulus signals U.S. economic growth is becoming more sustainable, according to Grace Tam, a Hong Kong-based global market strategist at JPMorgan Asset, which manages about $1.5 trillion.

“It’s going to benefit the Korean stock market,” especially electronics and auto exporters, Tam said. “We have been buying Korean shares selectively because they have had very deep corrections.” She declined to identify specific companies.

Exporters comprise more than 40 percent of the MSCI Korea index. Samsung Electronics, the world’s largest smartphone maker, represents 25 percent of the gauge.

Shares of Samsung, based in the southern city of Suwon, sank 13 percent in June. While the company’s second-quarter earnings missed estimates, analysts surveyed still project third-quarter operating profit to reach a record 10.6 trillion won ($9.3 billion). The stock traded at 1.4 times net assets on July 8, the lowest since January 2012.

Charlemagne’s Mayo said his firm bought shares of Kia Motors, an affiliate of Hyundai Motor, in recent months. Hyundai Motor’s shares trade for six times projected 12-month profit, while Kia is valued at a multiple of 6.2. That’s at least 49 percent lower than Japan’s Toyota Motor, the world’s largest automaker, which trades for 12.1 times.

“Korea is a very attractive market,” Kelvin Tay, Singapore-based chief investment officer for the southern Asia- Pacific region at UBS AG’s wealth management unit, wrote in an e-mail. “Earnings should improve from this point. The slower rate of depreciation of the yen should also help boost market sentiment on Korea.”

The won’s 4 percent decline since it settled at 9.221 against the yen on May 22, the strongest level since September 2008, has eased concerns about the competitiveness of Korean exporters versus Japanese rivals.

A weaker won will help the South Korean economy recover in the second half, Goldman Sachs Group said in an earlier report. Korea’s first-quarter gross domestic product grew 1.5 percent, matching the previous three months’ pace, according to Bank of Korea data.

Korea offers a “very exciting new opportunity,” Samir Shah, an investment manager at London-based Advance Emerging Capital, wrote in an e-mail. “Valuations are relatively cheap. Furthermore, the currency has reversed against the yen. We see corporate earnings being revised upward.” Bloomberg