Foreign investment banks (IB) are switching their prospects on the Korean economy and financial markets.
In the first half of 2013, they predicted a weakening of Korean exports due to factors such as the falling Japanese yen. Such concerns led to lowered prospects of economic growth.
In contrast, as foreign investors are on a net buying trend, IBs are pouring out positive remarks. Some foreign IBs that were at the forefront of slashing stock prices are now even recommending “buy.”
Some market experts interpret it as increased confidence in the Korean economy while others suggest a possibility of other intentions of creating profits.
Prospects on Korean Markets Differ from Time to Time
According to the financial investment industry reports released on September 10, Credit Suisse evaluated on September 9 that the Korean businesses are performing better than the other emerging economies, and that the Korean stock market is undervalued. Credit Suisse forecasted Korean businesses to see more than 20% growth in operating profits over last year, and earnings per share (EPS) to grow by 17%.
Morgan Stanley also said through their report on Korean markets released on September 4 that the “Korean economy will benefit from the fast recovery of advanced economies such as the US, UK, and Japan and overcome the crisis by the Eurozone countries.” It also analyzed that “Korea is a safe haven that is differentiated from other Asian countries.” Morgan Stanley forecasted Korean businesses to show improved 3Q-4Q performance over the previous quarter. Furthermore, the current Korean 12-month forward PER is underestimated at 8.2, lower than the historic average of 9.1.
In the recent report, “Fading EM Equity with High CA Deficits,” Goldman Sachs recommended “Expansion of Weight” on Korean markets and “Market-equivalent Weight” on Chinese and Taiwanese markets. Goldman Sachs specifically pointed out that the Korean stock market is undervalued, and selected it as one of the only emerging markets to expand investments.
In the first half of 2013, however, prospects were generally negative.
At the end of April, estimated GDP growth rates by ten major IBs such as Morgan Stanley and Goldman Sachs have averaged 2.8%. This was 0.1% point lower than the 2.9% at January’s end.
Next year’s GDP growth rate was also lowered from 4.0% in January to 3.9% in April. At the beginning of last year, IBs forecasted this year’s GDP growth rate to be an average of 4.3%, lowered it to 4% last June, and lowered it again to a little less than 3% this January.
Why do foreign IBs change their prospects so often?
Experts relate this to the flow of foreign funds. When foreign investors are on a buying trend, remarks are generally positive while on the opposite case, slashing of Korean economy takes place.
In order to be free from capricious foreign press and IB prospects, market experts point out that the fundamental nature of Korean capital markets needs to be adjusted. Korea is a small open economy that is affected by external economic variables and is perceived as a good market to “hit and run away” among the hot moneys.
“It is more advisable for governments in emerging economies to play the role of a reasonable market friction provider than a complete liberalist,” said Professor Jae-joon Han of Inha University. “They should restrict the transactions in financial markets to a certain degree, even if they face criticism. In such regards, restrictions in forward trading positions, taxation of bond investments, and foreign exchange stability levy need to be strengthened,” he added.
But some point out that foreign IBs may not really have hidden intentions. The reason is that the Korean economy has changed.
“As foreign buyers remain more bullish than expected, prospects on the Korean economy are also becoming more positive,” said high-ranking official at a foreign IB. “This reflects investors’ confidence in the Korean economy,” he added. In fact, credit ratings agency Fitch has forecasted that Korea’s economic growth rate to be 2.6% this year and 3.4% by next year. Standard & Poor is also rumored to consider upward adjustment of the Korean credit rating.