Institutional investors look abroadThe worst onshore sovereign bond returns in eight years are forcing Korea’s pension funds, insurers and asset managers to hunt for higher yields abroad.
Local-currency government securities gained 0.9 percent in 2013, the least since posting a loss in 2005, according to an HSBC Holdings index, and the extra yield 10-year notes offer over similar-maturity U.S. Treasuries shrank to a six-year low of 62 basis points on Sept. 12. Philippine notes returned 8.4 percent, Asia’s best performance, while Indonesian bonds posted the biggest decline in the region of 13.6 percent.
Samsung Asset Management, which oversees 89 trillion won ($83 billion) as the country’s largest bond fund manager, created a four-member team in July tasked with investing in overseas debt, while the Korean Teachers’ Credit Union said on Nov. 5 that it will buy preferred shares of 101 Avenue of the Americas building in Manhattan.
Purchases of foreign equities by Korean institutions jumped 66 percent this year to $4.8 billion, according to Hana Daetoo Asset Management.
“Investing in overseas bonds isn’t an option, but a necessity,” said Lee Do Yoon, head of fixed income at Samsung Asset in Seoul. “Just as the Japanese turned their eyes to assets abroad, we are left with no choice but to follow suit given low economic growth and low yields at home.”
Average yields on Korea’s sovereign bonds reached an all-time low of 2.74 percent on May 3 and have since climbed to 3.49 percent, according to the HSBC indexes. That’s below the five-year average of 4.01 percent. In the Philippines, which was ravaged by a deadly typhoon on Nov. 8, yields increased three basis points in November to 4.18 percent.
The $1.1 trillion Korean economy expanded 1.1 percent in the third quarter from the preceding three months, matching the increase in the April-to-June period. The central bank cut its 2014 growth forecast to 3.8 percent in October from 4 percent, and kept the 2013 estimate at 2.8 percent.
Korea’s Kospi index of shares rose 0.7 percent in 2013, set for its smallest annual gain since 1989. The gauge climbed 9.4 percent in 2012 following an 11 percent loss the previous year. Only China’s CSI 300 of stocks fared worse in Asia this year, with a decline of 4.6 percent.
“It’s hard to get the varieties and size of investments, not to mention returns, should you only look at domestic markets,” said Kim Joong-hyun, head of the global research team at Shinhan Investment in Seoul. “Demand for overseas assets is growing fast.”
Just as domestic funds increase overseas assets, the yields offered on Korean debt are still attracting global investors seeking alternatives to developed countries. They own 18 percent of the nation’s bond market, according to a July report from JPMorgan Chase & Co.
Korea’s 10-year local-currency notes yield 3.6 percent, compared with 0.64 percent on similar-maturity Japanese notes, 1.71 percent on German bunds and 2.75 percent on U.K. Gilts. U.S. Treasuries offer 2.7 percent.
While Asia’s fourth-largest economy has proven resilient to the prospect of tapering U.S. stimulus by posting a record current-account surplus, its aging population may become a drag on growth in coming decades. Expansion will slow to 2.7 percent per annum in the 20 years through 2030, compared with an average of 5.6 percent between 1990 and 2010, according to the Organization for Economic Cooperation and Development.
Korea’s population is aging at the fastest pace among advanced nations, according to the OECD. Statistics Korea estimates that by 2026, one in five citizens will be aged 65 or over, a rate the United States won’t attain until a decade later.
“With the population aging fast, pension funds and insurers have seen rapid growth in assets,” said Shin Dong-jun, a strategist at Hana Daetoo in Seoul. “They are coming under pressure to improve returns and have started looking at alternative investments as domestic yields can’t deliver promised returns.”
Overseas bond investment by Korean institutions jumped $2.7 billion, or 14 percent, to $21.9 billion in the first half of the year, led by $1.4 billion of purchases by local insurers, central bank data show. The country also ranked second in the world after the U.S. in terms of cross-border property investment amounting to $5.4 billion in the period, according to a presentation by Hana Daol Fund Management at a seminar in Seoul on Nov. 6, citing figures from Jones Lang LaSalle.