2014 may be a record year for Kospi

Korea’s equity strategists say the Kospi index will rise to a record in 2014 as export earnings climb and Asia’s lowest valuations lure foreign investors.

The benchmark gauge for the nation’s $1.2 trillion equity market will rally 18 percent next year to 2,341, above its record close of 2,228.96 in May 2011, according to the average forecast in a Bloomberg survey of 15 strategists at firms from Goldman Sachs Group to UBS AG. The MSCI Asia Pacific Index will probably gain about 12 percent next year, according to analyst estimates compiled by Bloomberg.

Korea’s record current account surplus and growing exports spurred overseas investors to buy a net $13.5 billion of the country’s shares in the second half, as the prospect of reduced Federal Reserve stimulus increased the appeal of Asia’s strongest economies. The Kospi’s price-to-book ratio is 29 percent lower than that of the regional index, even after the Korean gauge rose 11 percent from this year’s low in June.

“Next year’s global recovery will be robust,” Kwon Goo-hoon, the chief Korea economist and strategist at Goldman Sachs who has a target of 2,350 for the Kospi, said in a phone interview on Dec. 3. “Earnings are bound to rise. We have more confidence about our target for next year.”

Kospi index profits will probably climb 18 percent in 2014, Kwon said. He favors stocks tied to economic growth, including electronic-equipment makers and metals producers.

Asia’s fourth-largest economy is benefiting from the combination of faster expansions in developed countries and growing demand at home, according to Clive McDonnell, an equity strategist at Standard Chartered in Singapore.

Exports to the United States jumped 18.5 percent in November while shipments to Europe climbed 15.5 percent. Consumer confidence is the highest since February 2011, according to the Bank of Korea. Gross domestic product increased 3.3 percent in the third quarter, the fastest pace in almost two years, and the central bank expects growth to accelerate to 3.8 percent next year.

“Both external and domestic demand should add tailwinds to equity markets next year,” McDonnell, who raised his recommendation on South Korea to overweight from underweight, wrote in a Dec. 5 report.

His 2,400 forecast for the Kospi is tied for the second-highest among strategists surveyed by Bloomberg after the 2,420 estimate from Woori Investment and Securities. The average projection of 2,341 was compiled using the high-end estimate from strategists who provided a target range. The average of eight low-end estimates for the Kospi was 1,903.

The 765-stock gauge dropped 3.2 percent last week, the biggest retreat in more than five months, to 1,980.41. The won strengthened less than 0.1 percent against the dollar and the yield on 10-year government notes rose seven basis points to 3.75 percent.

The economy’s reliance on overseas demand leaves stocks in the country exposed to declines if the global expansion fails to meet investor expectations next year, according to Fan Jiang, the chief investment strategist for Asia at JPMorgan Private Bank.

Equity valuations are low relative to the region because South Korea’s corporate profits are vulnerable to swings in the global economy, Jiang said. Bloomberg