Global Investing » South Korea Insights behind the investment headlines Thu, 28 May 2015 18:31:20 +0000 en-US hourly 1 Discovering Pyongyang’s view with a North Korean diplomat Wed, 21 May 2014 07:25:54 +0000 Last week I went to a very unique session on North Korea which featured a rare appearance of a North Korean diplomat, at London-based policy institute Chatham House.

A wide range of topics — from North-South relations, human rights, a potential nuclear test to a new generation of young diplomats — were discussed, but  under the so-called Chatham House rules (meaning I cannot reveal who said what).

Participants discussed how Pyongyang’s relationship with South Korea and the United States has been deteriorating as both sides exchange some pretty acrid verbal attacks. For instance earlier this month North Korea’s official KCNA called  South Korean President Park Geun-hye a “political prostitute” while it described U.S. President Barack Obama as a “wicked black monkey”.  South Korean Ministry of Defence spokesman Kim Min-seok for his part, had retorted that North Korea wasn’t a real country and that it existed solely to prop up a single person.

The North’s argument is that all those abusive comments were made by members of the North Korean public and were just reported by the KCNA.

The country has been defensive over allegations of human rights abuses in North Korea, though it admits not all is perfect in the country. This stance perhaps explains a recent move by Pyongyang to agree to review some of the U.N. recommendations to improve human rights in the country.

Participants also discussed a new British Council exhibition that sheds a light on the lives of ordinary North Koreans. Shot by photojournalist Nick Danziger, the exhibit is seen as ground-breaking in terms of getting a Western photographer into the country to take photos.

Recent reports that Russia could in future possibly displace China as Pyongyang’s closest partner were also discussed.  The Institute for Far Eastern Studies said in a recent report: “North Korea and Russia have been garnering attention lately as closer ties are being formed between the two nations through personnel exchanges and increased economic cooperation. It may even appear as though Russia has begun to edge out China as North Korea’s closest ally.”

“On the other hand, the exchanges between China and North Korea are on a downslide,” the report added.

The think tank says the DPRK-China trade volume for the first quarter decreased 2.83 percent to 1.27 billion USD from the previous year.

However, imports from Hong Kong, especially in alcoholic drinks, are surging, according to North Korean Economy Watch.  North Korean imports of alcoholic beverages from Hong Kong shot up 51.3 percent last year from 2012, with whiskey and vodka making up the bulk.

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The hit from China’s growth slowdown Fri, 11 Oct 2013 15:16:11 +0000 China’s slowing economy is raising concern about the potential spillovers beyond its shores, in particular the impact on other emerging markets. Because developing countries have over the past decade significantly boosted exports to China to offset slow growth in the West and Japan, these countries are unquestionably vulnerable to a Chinese slowdown. But how big will the hit be?

Goldman Sachs analysts have crunched the numbers to show which markets and regions could be hardest hit. On the face of it non-Japan Asia should be most worried — exports to China account for almost 3 percent of GDP while in Latin America it is 2 percent and in emerging Europe, Middle East and Africa (CEEMEA) it is just 1.1 percent, their data shows.

But they warn that standard trade stats won’t tell the whole story. That’s because a high proportion of EM exports are re-processed in other countries before reaching China which in turn often re-works them for re-export to the developed world. In other words, exports to China from say, Taiwan, may be driven not so much by Chinese demand but by demand for goods in the United States or Europe. So gross trade data may actually be overstating a country’s vulnerability to a Chinese slowdown.

GS relies instead on so-called “trade in value-added” data that allows it to separate direct exports to China and indirect trade connections. Measured this way and using industrial output as a proxy for growth, emerging Asia’s effective exposure to China turns out to be half of that measured using gross trade data:

In terms of levels, a one standard deviation shock to China’s industrial production  (roughly equivalent to a 4 percent annualised growth shock) would lower the level of industrial output in non-Japan Asia by some 0.6 percent on average in 12 months from the time of the shock, so roughly by as much as the fall in China’s industrial production in that period, as per our model estimates. The average impact would be smaller for the CEEMEA countries (some 0.5 percent on average) and the LatAm countries (0.43 percent).

And in terms of GDP:

The same shock would affect GDP in Asian EMs the most. GDP level could fall there by about 0.36 percent on average, so as much as in China. The impact on CEEMEA (just below 0.3 percent) and LatAm (0.25 percent) would be more limited

All in all the figures are probably not giving policymakers sleepless nights. Philippine or South Korean growth may take a half-percent impact in the first year after the Chinese slowdown while in India or Poland the hit will be as little as 0.2 percent, Goldman calculates.


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Russia — the one-eyed emerging market among the blind Fri, 16 Aug 2013 13:43:28 +0000 It’s difficult to find many investors who are enthusiastic about Russia these days. Yet it may be one of the few emerging markets  that is relatively safe from the effects of “sudden stops” in foreign investment flows.

Russia’s few fans always point to its cheap valuations –and these days Russian shares, on a price-book basis, are trading an astonishing 52 percent below their own 10-year history, Deutsche Bank data shows.  Deutsche is sticking to its underweight recommendation on Russia but notes that Russia has:

“become so unpopular with the investor community that it is a candidate for the ‘it’s so bad it’s good’ club as evidenced by the very cheap valuations and long-term  underperformance.

The real game changer however is outside financing needs. Quite simply, Russia runs a current account surplus and is therefore in a better position than India or Turkey which will face a funding crunch if foreign money stops coming in.

Analysts at Morgan Stanley reckon that out of 20 big emerging economies, Russia is the least vulnerable to the sudden stop syndrome. They point to the following factors:

a)  Portfolio flows between mid-2009-end-2012 rose by just 1 percent of GDP in Russia (10 pct or more in Mexico, South Africa and Turkey)

b) Short-term external debt is less than 20 percent of Russian hard curency reserves (100 pct in Turkey; 35-40 percent in India and South Korea)

c) Russia has a current account surplus of almost 4 percent of GDP  (vs 4.5-6 percent of GDP deficits in India, Turkey and South Africa)

So Morgan Stanley is 250 basis points overweight Russia in its model portfolio and says:

China and Russia are among the countries with the least exposure to the risk of an EM ‘sudden stop’ scenario. Their lower usage of external financing and relatively strong sovereign balance sheets would protect them better than other EM countries, in our view.

Which is not to say Russia has escaped the woes besetting emerging markets. Far from it — the rouble is at four year lows and the central bank has spent billions of dollars in its defence. Russia equity funds have seen outflows of $1.8 billion this year, say banks citing figures from EPFR Global. The country remains reliant on oil; reforms and privatisations have stalled; politics are messy.

But just look around. Other emerging markets are in a tighter spot.

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Weekly Radar: Watch the thought bubbles… Thu, 09 May 2013 13:42:32 +0000 Far from the rules of the dusty old investment almanac, it’s up, up and away in May after all. And judging by the latest batch of economic data, markets may well have had good reason to look beyond the global economic ‘soft patch’ – with US employment, Chinese trade and even German and British industry data all coming in with positive surprises since last Friday. Is QE gaining traction at last?

Well, it’s still hard to tell yet in the real economy that continues to disappont overall. But what’s certain is that monetary easing is contagious and not about to stop in the foreseeable future – whether there’s signs of a growth stabilisation or not. With the Fed, BoJ and BoE still on full throttle and the ECB cutting interest rates again last week, monetary easing is fanning out across the emerging markets too. South Korea was the latest to surprise with a rate cut on Thursday, in part to keep a lid on its won currency after Japan’s effective maxi devaluation over the past six months. But Poland too cut rates on Wednesday. And emerging markets, which slipped into the red for the year in February, have at last moved back into the black – even if still far behind year-to-date gains in developed market equities of about 16%!

Not only have we got new records on Wall St and fresh multi-year highs in Europe and Japan, there’s little sign that either this weekend’s meeting in London of G7 finance chiefs or next weekend’s G20 sherpas gathering in Moscow will want to signal a shift  in the monetary stance. If anything, they may codify the recent tilt toward easier austerity deadlines in Europe and elsewhere. But inevitably talk of unintended consequences of QE and bubbles will build again now as both equity and debt markets race ahead , even if the truth is that asset managers have been remarkably defensive so far this year in asset, sector and geographical choices …  one can only guess at what might happen if they did actually start to get aggressive! Perhaps the next pause will have to come from the Fed thinking aloud again about the longevity of its QE programme — so best watch those thought bubbles!


Next week’s big data and events:

G7 finance ministers and central bank governors meet in London Sat

EBRD meeting in Istanbul Sat

Pakistan general elections Sat

Bulgaria parliamentary elections Sun

China April Industrial output/retail sales Mon

France/Italy bond auctions Mon

Euro group meeting Mon

US April retail sales Mon

Indonesia rate decision Tues

EZ March industrial production Tues

German May ZEW sentiment Tues

ECOFIN meeting Tues

UK 5-yr gilt/Japan 30-yr JGB/Dutch DSL auctions Tues

EZ/DE/FR/IT flash Q1 GDP Weds

UK April jobless Weds

Iceland rate decision Weds

Greek PM Samaras in China Weds

Japan Q1 GDP Thurs

UK 30-yr gilt/Japan 5-yr JGB auction/German 2-yr auction Thurs

Spain’s Rajoy meets with unions on pension reforms Thurs

Draghi speech Milan Thurs

US/EZ April CPI Thurs

US April housing starts/permits, May Philly Fed index Thurs

Turkish rate decision Thurs

Turkey’s Erdogan in Washington Thurs

G20 sherpas meeting in St Petersburg Sat/Sun


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Amid yen weakness, some Asian winners Wed, 17 Apr 2013 09:36:29 +0000 Asian equity markets tend to be casualties of weak yen. That has generally been the case this time too, especially for South Korea.

Data from our cousins at Lipper offers some evidence to ponder, with net outflows from Korean equity funds at close to $700 million in the first three months of the year. That’s the equivalent of about 4 percent of the total assets held by those funds. The picture was more stark for Taiwan funds, for whom a similar net outflow equated to almost 10 percent of total AuM. Look more broadly though and the picture blurs; Asia ex-Japan equity funds have seen net inflows of more than $3 billion in the first three months of the year, according to Lipper data.

Analysts polled by Reuters see more drops ahead for the yen which they predict will trade around 102 per dollar by year-end (it was at 77.4 last September). Some banks such as Societe Generale expect a 110 exchange rate and therefore recommend being short on Chinese, Korean and Taiwanese equities.

But the weak yen may not be unilaterally bad news for Asian companies. Morgan Stanley analysts have compiled a list of Asian shares that could gain from falling yen costs. Take India’s Maruti-Suzuki. It has zero exposure to yen in terms of revenue but its cost exposure (due to import or components) is 34 percent. A similar picture at China Motor Corp. in Taiwan. Another Taiwanese firm, semiconductor maker Siliconware Precision has a 2 percent revenue exposure to Japan but the yen accounts for 15 percent of its cost base, according to MS data.

Other examples.  MS highlights Taiwan’s casings maker Catcher which holds 54 percent of its debt in yen. It calculates that every 1 percent fall in the yen translates to 1.3 percent upside to its annual income. Tour operators and airlines could also benefit if they are able to send more visitors to newly-cheap Japan.

So a basket of Taiwanese “winner” stocks picked by MS, has returned 10 percent in dollar terms since last November. And broader Taipei stocks are up 1.5 percent year-to-date, compared with a 4 percent drop in Seoul.

So what of South Korea? The Seoul index is down around 4 percent so far this year. But MS point out that companies such as Samsung Engineering and Hyundai Heavy Industries actually performed pretty decently during past periods of yen weakness. As we have written in the past, auto and electronics makers are indeed vulnerable to the weak yen, but not every sector will necessarily take a hit.

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Asia’s credit explosion Fri, 22 Mar 2013 15:41:56 +0000 Whatever is happening to all those Asian savers? Apparently they are turning into big time borrowers.

RBS contends in a note today that in a swathe of Asian countries (they exclude China and South Korea) bank deposits are not keeping pace with credit which has expanded in the past three years by up to 40 percent.

Some of this clearly is down to slowing exports and a greater focus on the domestic consumer.  Credit levels are also rising overall in these economies because of borrowing for big infrastructure projects.  But there are signs too that credit conditions are too loose.

Hong Kong, Singapore and Thailand are the three countries where credit is expanding most rapidly, according to RBS.  And in terms of household indebtedness, ratios in  Hong Kong, Malaysia and Singapore now exceed 65 percent of GDP (that’s not terribly far off US households’ debt-GDP ratios of around 80 percent)

RBS analysts acknowledge that these levels by themselves do not seem daunting. But they warn: 

What is however worrying is the pace of credit growth. …The combination of rapid credit disbursals and more importantly, the on-going divergence between credit disbursals and GDP growth implies that the system is becoming more vulnerable to income and interest rate shocks.

The analysts cite the example of Singapore  where household liabilities rose to 74 percent of GDP from 61 percent in the 2008-2012 period.  The corresponding increase in  household wealth was almost entirely concentrated in property, leaving households exposed to a decline in property prices or higher interest rates.

There are other potential consequences too. The rise in borrowing comes at a time when labour productivity across much of Asia is declining (see graphic). This divergence eventually will hit the region’s balance of payments — India, Indonesia and Thailand are already deficit countries while Malaysia’s surplus has fallen sharply.  Second, the rise in credit is impacting banks’ loan-deposit ratios (see graphic).

Signs are that savings rates are declining while there has also been a shift away from buying financial assets into gold or real estate — low interest rates are an effective deterrent to savers. RBS says:

This diversion…implies that unless deposit growth picks up, the current pace of credit growth can not be sustained. For deposits to rise, deposit rates need to rise and in real terms. The mismatch between lending and deposits also implies monetary tightening has been insufficient.
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Hyundai hits a roadbump Thu, 24 Jan 2013 14:51:36 +0000 The issue of the falling yen is focusing many minds these days, nowhere more than in South Korea where exporters of goods such as cars and electronics often compete closely with their Japanese counterparts. These companies got a powerful reminder today of the danger in which they stand — quarterly profits from Hyundai fell sharply in the last quarter of 2012.  (See here to read what we wrote about this topic last week)

Korea’s won currency has been strong against the dollar too, gaining 8 percent to the greenback last year. In the meantime the yen fell 16 percent against the dollar in 2012 and is expected to weaken further. Analysts at Morgan Stanley pointed out in a recent note that since June 2012, Korean stocks have underperformed Japan, corresponding to the yen’s 22 percent depreciation in this period. Their graphic below shows that the biggest underperformers were consumer discretionary stocks (a category which includes auto and electronics manufacturers). Incidentally, Hyundai along with Samsung, makes up a fifth of the Seoul market’s capitalisation.

Shares in Hyundai and its Korean peer Kia have fared worst among major global automakers for the past three months – down 5 percent and 18 percent, respectively.  Both companies expect sales this year to be the slowest in a decade. Toyota on the other hand has risen 30 percent and expects to reach the top spot in terms of world sales for the first time since 2010.

Lim Hyung-geun, a fund manager at GS Asset Management, is one of the many investors who have offloaded Hyundai stock, helping to push its shares down 5 percent on Thursday.  The strong won is one reason, he tells Reuters:

Hyundai’s ability to overcome worsening external factors will be put to the test this year.   

There is a bright spot for Hyundai however. It stands to benefit from Japan’s territorial dispute with China which has seen consumers  in the world’s biggest car market boycott Japanese goods. Hyundai expects China sales to rise 13.3 percent compared with 12 percent last year.  Sales of Japanese brands such as Nissan and Toyota on the other hand are down 16-30 percent down from year-ago levels.

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Korean exporters’ yen nightmare (corrected) Thu, 17 Jan 2013 10:42:21 +0000 (corrects name of hedge fund in para 3 to Symphony Financial Partners)

Any doubt about the importance of a weaker yen in thawing the frozen Japanese economy will have been dispelled by the Nikkei’s surge to 32-month highs this week. Since early December, when it became clear an incoming Shinzo Abe administration would do its best to weaken the yen, the equity index has surged as the yen has fallen.

Those moves are giving sleepless nights to Japan’s neighbours who are watching their own currencies appreciate versus the yen. South Korean companies, in particular, from auto to electronics manufacturers, must be especially worried. They had a fine time in recent years  as the yen’s strength since 2008 allowed them to gain market share overseas. But since mid-2012, the won has appreciated 22 percent versus the yen.  In this period, MSCI Korea has lagged the performance of MSCI Japan by 20 percent. Check out the following graphic from my colleague Vincent Flasseur (@ReutersFlasseur)

David Baran, co-founder of Tokyo-based Symphony Financial Partners, notes the relative performance of Hyundai and Toyota (Hyundai shares have fallen 2.5 percent this year adding to 13.5 percent loss in the last quarter of 2012. Toyota on the other hand is up 5 percent so far in 2013 after gaining 31 percent in Oct-Dec last year). Baran says he has gone long the Nikkei and short the Seoul index (the Kospi) and (Hong Kong’s) Hang Seng, while taking a short position on the yen. He says:

Dollar/yen went from 125 to 77 at the exporters’ expense and the Koreans benefited massively from this. Now, if we get a situation where the yen goes into the mid-90s or lower, Japanese corporates will be fantastically profitable and that’s what people are starting to build into equity  allocations. The feeling is that greater damage will be towards Korean exporters in favour of the Japanese.

Analysts at Morgan Stanley predict the won may appreciate another 10 percent  against the yen by year-end. But they are less worried about the outlook for Korean exporters, telling clients this week that unless the yen/won cross depreciated another 30 percent, Korean exports would not be structurally undercut.

The reasons? Many Korean companies have moved production overseas to countries like Thailand and India and are therefore less reliant on the won’s exchange rate. Second, Korean exports compete less with Japan’s than in the past. (“Think more Samsung v. Apple, not v. Sony,Morgan Stanley tell clients) . Lastly, the global growth cycle appears to be finally turning, they say:

BoJ-induced currency strength…is likely to undercut Korean exporters’ earnings in the short term. However, as the pace of currency decline eases, we expect global growth to outweigh any concerns related to reduced export competitiveness vs. the Japanese.

For now, foreign cash is headed for Japanese shares. Fund tracker EPFR Global say inflows  hit a 20-week high last week while Bank of America/Merrill Lynch’s monthly investor survey shows global equity funds went overweight Japan in January for the first time since mid-2011.

Eventually, what this means is that the Bank of Korea — and others in Asia — will have to act to support their own export sectors. Expect more currency wars in the months ahead.

As Moscow takes up the helm of the G20 grouping this year, Russian central banker Alexei Ulyukayev said on Wednesday: “We’re on a threshold of a very serious, confrontational actions in the sphere that is known … as currency wars.”



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A yen for emerging markets Fri, 04 Jan 2013 12:57:16 +0000 Global Investing has written several times about Japanese mom-and-pop investors’  adventures in emerging markets. Most recently, we discussed how the new government’s plan to prod the Bank of Japan into unlimited monetary easing could turn more Japanese into intrepid yield hunters.  Here’s an update.

JP Morgan analysts calculate that EM-dedicated Japanese investment trusts, known as toshin, have seen inflows of $7 billion ever since the U.S. Fed announced its plan to embark on open-ended $40-billion-a-month money printing.  That’s taken their assets under management to $67 billion. And in the week ended Jan 2, Japanese flows to emerging markets amounted to $234 million, they reckon. This should pick up once the yen debasement really gets going — many are expecting a 100 yen per dollar exchange rate by end-2013  (it’s currently at 88).

At present, the lion’s share of Japanese toshin holdings — over $40 billion of it — are in hard currency emerging debt, JP Morgan says (see graphic).

But if developed central banks’ seemingly endless money-printing starts to significantly inflate emerging currencies again, local currency debt is likely to become more attractive.

Just a rough example. If Mrs Watanabe, as Japanese retail investors have collectively been dubbed,  had sold her yen at the start of last year to buy dollars, she would have made a healthy 15 percent return as the yen weakened. But if she had bought Korean won, she would have gained over 21 percent.

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The Watanabes are coming Fri, 28 Dec 2012 11:32:11 +0000 With Shinzo Abe’s new government intent on prodding the Bank of Japan into unlimited monetary easing, it is hardly surprising that the yen has slumped to two-year lows against the dollar. This could lead to even more flows into overseas markets from Japanese investors seeking higher-yield homes for their money.

Japanese mom-and-pop investors — known collectively as Mrs Watanabe –  have for years been canny players of currency and interest rate arbitrage. In recent years they have stepped away from old favourites, New Zealand and Australia, in favour of emerging markets such as Brazil, South Africa and Turkey. (See here  to read Global Investing’s take on Mrs Watanabe’s foray into Turkey). Flows from Japan stalled somewhat in the wake of the 2010 earthquake but EM-dedicated Japanese investment trusts, known as toshin, remain a mighty force, with estimated assets of over $64 billion.  Analysts at JP Morgan noted back in October that with the U.S. Fed’s QE3 in full swing, more Japanese cash had started to flow out.

That trickle shows signs of  becoming a flood. Nikko Asset Management, the country’s third  biggest money manager, said this week that retail investors had poured $2.3 billion into a mutual fund that invests in overseas shares — the biggest  subscription since October 2006. This fund’s model portfolio has a 64 percent weighting to U.S. shares, 14 percent to Mexico and 10 percent to Canada while the rest is split between Latin American countries.

And what of currency wars? The yen has slumped 12 percent against the dollar this year while currencies from emerging economies Korea, Philippines, and Mexico have  risen 6-7 percent. JP Morgan predicts the yen, currently trading around 86 to the dollar,  will trade between 80 and 90 next year ( previous estimate 75-85 yen) But some in the new administration want more — Abe’s special advisor Koichi Hamada says only a 95-100 per dollar level would be proof that monetary easing is working.

So emerging central banks may have a hard fight to keep a lid on their currencies if outflows from Japan gather momentum. Look at the Korean won — it is trading at a 2-1/2 year high against the yen, having risen 21 percent in 2012, the largest annual gain since 1998. That’s painful for an economy that sends around 6 percent of its exports to Japan; its companies from carmakers to electronics manufacturers compete against Japan for other export markets and all that should eventually force the central bank to step in. The Singapore dollar meanwhile has appreciated 19 percent versus the yen this year.

Japanese citizens have 1,500 trillion yen in personal assets and the mutual fund industry is worth $720 billion. Once the yen debasement gets fully under way, more of this cash will be hunting for yield overseas.



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