International | Jun 22 2006
By Chris Shaw
The shakeout in global equity markets over the past month or so has not spared the South Korean market, where the index has lost about 17% since May 8. In the view of HSBC such a move is an overreaction, as in its view the market is now the best value in the Asian region.
The bank gives several reasons why it adopts such a view, including the fact the economy remains healthy thanks to ongoing strength in exports, capex, consumption and external demand.
This external demand hasn’t extended as far as equities though, as figures show foreign investors have sold as much as US$5.2bn in Korean equities since the correction began, though as HSBC notes one positive is local investors have been on the buying rather than selling side of the ledger.
The bank has not changed its overweight stance on the Korea market, a position in contrast to most international funds that are now underweight compared to the MSCI benchmark.
It supports its overweight stance by pointing out the market’s forward P/E ratio is only 9.3%, which implies EPS growth of just 0.4% this year. In contrast, the Taiwanese market is trading on a P/E of 11.3 times, but EPS growth is forecast to be closer to 30%.
Such an expectation for the Korean market is unreasonable in HSBC’s view as the expectation remains for solid economic growth. It is forecasting growth for the year of 5.3% before slowing to 4.8% in 2007.
By means of comparison, the Bank of Korea is forecasting growth of 5% this year, while the International Monetary Fund is estimating growth of 5.5%.
A number of analysts suggest the earnings outlook justifies the low P/E multiple of the market overall, as conditions appear to be getting tougher. High oil prices are not helping, especially given Korea has to import all its energy needs.
Higher energy prices are pressuring inflation, while also increasing the potential for a slowdown in consumer spending and corporate profits. HSBC acknowledges this, noting consumer spending has been financed primarily by debt rather than higher wages, so higher rates to counter inflation could create something of a squeeze. Such an outcome is being factored in by UBS, which expects growth will slow in the second half as household disposable income falls and exports slow, a view shared by Barclays Capital.
The Samsung Economic Research Institute also takes a similar view, forecasting growth to slow to 4.5% in the third quarter and to 3.7% in the final quarter this year.
Such a slowdown shouldn’t impact much further on the market though, says HSBC, as it points out with many investors already underweight the market there is unlikely to be further bouts of significant selling.
The bank continues to favour sectors such as banks, telecoms, defensives (food retailers, pharmaceuticals) and technology, with a preference for companies whose exposure is weighted towards domestic demand. With this in mind, HSBC continues to be wary of companies in more cyclical sectors and those exposed primarily to exports.
