Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Save to My Library
Look up keyword
Like this
1Activity
0 of .
Results for:
No results containing your search query
P. 1
Asia Strategy: Is Korea the new safe haven?

Asia Strategy: Is Korea the new safe haven?

Ratings: (0)|Views: 13 |Likes:
Published by SEB Group
Korea’s performance across asset classes has been resilient in the last two months, while many in emerging markets have suffered. Is Korea the new safe haven? Sean Yokota, SEB’s head of Asia Strategy, doesn’t think so.
Korea’s performance across asset classes has been resilient in the last two months, while many in emerging markets have suffered. Is Korea the new safe haven? Sean Yokota, SEB’s head of Asia Strategy, doesn’t think so.

More info:

Categories:Types, Research
Published by: SEB Group on Sep 12, 2013
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

09/17/2013

pdf

text

original

 
 
You can also find our research materials at our website:www.mb.seb.se. This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document aregiven in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any director consequential loss resulting from reliance on this document. Changesmay be made to opinions or information contained herein without notice.
Is Korea the new safe haven?
THURSDAY
12 SEPTEMBER 2013
EDITOR
Sean Yokota
Head of Asia Strategy
+65 6505 0583
Focus:
Is Korea the new safe haven?
 
Korea’s performance across asset classes has been resilient in the last two months, whilemany in emerging markets have suffered. Korea’s equity market, Kospi is up almost 5% andthe Korean Won has strengthened versus the USD in similar amount as you can see in Chart 1.In the bond market, Korean yields have increased by a smaller amount than US Treasuries(Chart 2). Is Korea the new safe haven? We don’t think so.
FX Tracker - A look at Asian across asset performance, FX forwards and volatility overthe last month. What stands out?1) Performance –
a) The cyclical Korea and Taiwan continue to outperform. They lagged theregion over the last 12 months and were likely the least crowded. China is rebounding.Indonesia has finally started adjusting the spot market and hiking interest rates. It has takenthe first step towards improvement b) India’s rates have broken the trend from favorablemonetary policies. c) Yields are steepening from rise in US longer term yields but we think thiswill start to flatten where short term rates need to rise to stem capital outflows.
2) Forwards –
Carry is falling in most places as risk off sentiment eases. CNY NDF carry hasfallen from a move lower in fixing. Going long CNY onshore looks attractive. TWD and PHPnegative carry has increased as sentiment improves on these two currencies.
3) Volatility
- Vol and carry are moving in different directions, which typically means that vols too high, especially in IDR and INR.i
 
 
 
Asia Strategy Focus
Focus: Is Korea the new safe haven?
 
Korea’s performance across asset classes has been resilient in the last two months, while many in emerging markets havesuffered. Korea’s equity market, Kospi is up almost 5% and the Korean Won has strengthened versus the USD in similaramount as you can see in Chart 1. In the bond market, Korean yields have increased by a smaller amount than US Treasuries(Chart 2). Is Korea the new safe haven? We don’t think so.
Chart 1: Korea’s currency and equity are performing well Chart 2: Bond yields have not risen as much
(20)(15)(10)(5)051015
   K   R   W   E   U   R   T   W   D   C   N   Y   J   P   Y   S   G   D   Z   A   R   P   H   P   T   H   B   M   Y   R   T   R   Y   B   R   L   I   N   R   I   D   R
FX vs USD Equitychange from 28/06 to 06/09(%)
(50)050100150200
   I   D   R   T   R   Y   I   N   R   B   R   L   C   N   Y   T   H   B   U   S   T   Z   A   R   M   Y   R   A   U   D   S   G   D   B  u  n   d  s   T   W   D   K   R   W   J   P   Y   P   H   P
change from 28/06 to 06/095 year rate change (bp)
 
Source: Bloomberg, CEIC, SEB
Credit is due 
Korea is superior to other emerging markets on several dimensions. First, looking at the balance of payment flows, Korea runsa strong current account surplus and that surplus has been growing as you can see from the blue line in Chart 3. The possibleUS Federal Reserve tapering of monetary policy is leading to capital outflows but Korea can offset them via the currentaccount.Second, Korea hasn’t experienced strong capital outflows because foreign positioning in the equity and bond market has beenlow. In the government bond market, foreigners own only about 16% of the market compared to Australia at close to 70%,Malaysia at 43% and Indonesia at 31%. In Korea, foreigners have hardly sold their bond holdings as you can see from thegreen line in Chart 4.On equities, foreigners had been reducing their holdings in the first half of the year (blue line, Chart 4) largely from the strongequity performance in Japan. Japan and Korea compete head-on in industries such as autos, construction and shipbuildingand we think many had rebalanced away from Korea to Japan. Furthermore, in the last two months, Yen and Nikkeiperformance has eased and there is again a re-accumulation of Korean equities.
Chart 3: Korea’s current account surplus growing Chart 4: Positioning on the light side
Current Account % of GDP012345601 02 03 04 05 06 07 08 09 10 11 12 13
-6-4-20246810Dec-12 Jan-13Feb-13Mar-13Apr-13May-13 Jun-13 Jul-13Aug-13Sep-13Equity BondsNet Foreign Purchases KRW trn 10d roll sum
 
Source: Bloomberg, CEIC, SEB
2
 
 
 
Asia Strategy Focus
Tailwinds to subside 
We don’t think these are sustainable trends.First, we think the current account surplus will likely fall. The favorable current account position came from improved tradebalance from exports recovering faster than imports. We think this happened because Korea has had relatively higherinventory relative to production as you can see from Chart 6, which allowed Korea to export without importing too manyinputs. However, in the coming months, we expect inventories to decrease from continued increase in demand, raise importgrowth and narrow the trade surplus.Second, we think the Japanese Yen will continue to weaken and the Nikkei will march higher and again compete for capitalflows. Japan continues to run very loose monetary policy and they are ready to do more fiscal and monetary stimulus with anyblip in the equity market or growth outlook. We are already seeing the commitment by the Japanese authorities with theproposed increase in the consumption tax scheduled for April of 2014. The government already plans to implement fiscalstimulus to cushion the fall in consumption. If the fiscal stimulus is not enough, Bank of Japan is ready to implement moremonetary easing if the inflation and growth outlook weakens. This type of policy stance by Japan becomes headwinds forKorean assets to outperform. At least, it calls for a reduction in the strong equity inflows we’ve seen in the last 2 months.
Chart 5: It’s a 2 month phenomenon Chart 6: High inventory means less imports
20-3 -3-4-6-9-10-13-15-16-17-18-20(30)(25)(20)(15)(10)(5)05101520
   C   N   Y   E   U   R   K   R   W   T   W   D   S   G   D   T   H   B   P   H   P   M   Y   R   J   P   Y   T   R   Y   I   D   R   B   R   L   Z   A   R   I   N   R
FX vs USD equity% ytd
60708090100110120130
   J  a  n -   0   5   J  u   l -   0   5   J  a  n -   0   6   J  u   l -   0   6   J  a  n -   0   7   J  u   l -   0   7   J  a  n -   0   8   J  u   l -   0   8   J  a  n -   0   9   J  u   l -   0   9   J  a  n -   1   0   J  u   l -   1   0   J  a  n -   1   1   J  u   l -   1   1   J  a  n -   1   2   J  u   l -   1   2   J  a  n -   1   3   J  u   l -   1   3
ProductionInventoryKorea 2010=100
 
Source: Bloomberg, CEIC, SEB
In summary, we think rest of Asia and emerging markets will either catch up to Korea or Korea will start under-performing. Wedon’t recommend chasing the move lower in USD/KRW.
3
 

You're Reading a Free Preview

Download
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->