Now is the right time to buy South Korean equities

It is rare to find an economically sound market where both the equity market and the currency are inexpensively valued. In Korea, we may have both. The global onset of risk aversion combined with the worries stemming from a North Korean naval attack have pushed down Korean equities to a valuation level well below its long-term mean (statistically speaking, around one standard deviation).

1. Valuations – Korean equities have fallen from a valuation perspective – we’re not far off now from the lows of late 2008, and are now comfortably below one standard deviation from the usual long-term average level for the market. For Barclays Wealth, this is one of the most compelling reasons to be buying Korean equities now – our strategists do not see any reason for corporate earnings to drop by the amount the market fears and even a simple reversion to mean could carry significant upside. To us, this represents an attractive entry point. 

2. The Korean won – for a non-won investor, the inexpensive won argues for keeping currency exposure unhedged. The won is undervalued due to the geopolitical concerns in the Korean peninsula. This caused the currency to weaken a further 10 per cent since the beginning of May. We, at Barclays Wealth, believe this large move downwards is unjustified and the currency should strengthen from here. 

3. Positive economic prospects – Korea’s vice-finance minister noted that the economy was at a point close to full employment (the unemployment rate fell to 3.2 per cent in May despite a reduction in temporary government jobs). Additionally, most growth oriented data continues to print strongly where the industrial product increased by almost 20 per cent y-o-y in April, and the shipments to inventories ratio remained well below its long term average, which indicates that there was still more to go even from simple re-stocking demand in the electronics sector. What’s worth mentioning is that policy tightening is likely to begin later this year, which gives time for this investment call to generate returns. 

4. Export strength – Korean exports are a key part of the economy and tend to be relatively closely tied to regional and global economic prospects. A continued global recovery and rising Asian domestic consumption spending in the long term are likely to go some way in supporting growth. 

5. Overblown geopolitical concerns – Our strategists believe that geopolitical concerns over North Korea are unlikely to spill over into a wider conflict. Threats by the north have not been uncommon, but major regional powers have a strong incentive not to allow an outbreak of conflict, and without substantial backing it is unlikely the north would risk a major conflict. 

6. Robust capital inflows – equity inflows are volatile, as expected, but what has been remarkable to us is how fixed income inflows by foreign investors have been reasonably stable both in Korea as well as other countries in the region. For Barclays Wealth, this is a signal of investors’ confidence in the country’s fundamentals, both from a balance of payments point of view and from a fiscal point of view. After all Korea and Asia have come a long way since the 1997 crisis. 

7. Possible MSCI reclassification – MSCI has put up MSCI Korea for review for potential reclassification from emerging to developed. While this move is by no means certain, a reclassification would help bring in more rule-based investors to the market, supporting both the currency and equity markets on a medium term basis. 

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