International | Jun 28 2006
By Chris Shaw
The recent correction in equity markets globally has been very broad, meaning in several markets quality stocks and those with positive earnings outlooks have also been sold down in a case of throwing out the baby with the bathwater.
ABN Amro suggests the Korean market is a good example of this, as stocks with operations exposed to the capital expenditure (capex) cycle have been sold down heavily despite earnings estimates being lifted.
It is a view shared by HSBC, who earlier this month suggested South Korea was the best value market in the Asian region as equity prices had fallen despite the economy continuing to experience solid growth. Not all buy into the argument current growth rates are sustainable, with Alliance Bernstein recently suggesting there was downside risk to its estimate of 5% growth for 2006. Ratings Agency Moody’s is also forecasting growth this year of 5%, slowing to 4.5% in 2007.
The upgrades to earnings forecasts reflect ongoing strength in the capex cycle and has, in ABN Amro’s view, created an opportunity for investors, as looking on a one-year forward P/E basis value is emerging. Again HSBC concurs, the bank estimating the forward P/E for Korean stocks is now below 10 times thanks to estimates of low EPS growth in the coming year.
On ABN Amro’s calculations the small to medium sized enterprise lenders in the Korean market are now priced about 20% below the MSCI Korea benchmark, while service providers are 30% below and construction companies are also trading at a discount.
This may partly be a reflection of falling confidence in the economic outlook, as the Bank of Korea noted earlier this week the consumer confidence index fell to 101 in the second quarter, down from 109 in the March quarter. The March reading was the highest for the index for almost four years.
It is somewhat at odds to current market conditions, which show companies intend to lift investment spending going forward, an outcome backed by banking sector figures showing loans for investment growing at a faster rate than loans for working capital.
To identify opportunities ABN Amro used measures such as P/E ratios, Price/Book Value (P/BV) and ROE to P/BV as screens, with stocks scoring favourably on these measures considered best placed for performance. Fitting the bill according to its screening process were companies such as Cheung Kong Infrastructure, Hankook Tire, Hyundai Motor, Pusan Bank, Yue Yuen, CLP and Daelim Industrial.
