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Financial Stocks

Banking on South Korea

By Yiannis G. Mostrous, on Jul. 22, 2013

we expect South Korea’s economy to benefit from an uptick in US and UK economic growth in the back half of the year. Stable commodity prices should also keep inflation in check. Our outlook calls for the nation’s gross domestic product to grow at a rate of roughly 3 percent this year, thanks in part to robust capital formation.

The latest economic data from the country showed relatively weak domestic demand and slowing exports. But the government has introduced measures to stimulate the housing market, reducing interest rates on mortgages first-time homebuyers with lower incomes and allowing them to borrow more than previously allowed. Meanwhile, the Bank of Korea cut benchmark interest rates by 25 basis points in May.

These initiatives, coupled with a shift in funds from bank deposits to riskier assets (higher taxes on interest income should make high-net-worth individuals look elsewhere for returns), are expected bolster South Korea’s real-estate market, economy and stock market.

At the same time, Japan’s devaluation of the yen presents a challenge for South Korean exporters. Analysts estimate that whenever the Japanese yen depreciates by 1 percent relative to the won, exports from South Korea will decrease by 0.18 percent.

Investors should keep in mind that automakers, steel companies, manufacturers of home appliances and textile makers are among the industries that have the most exposure to fluctuation in currency-exchange rate.

With export-focused names accounting for about 65 percent of the Korean Stock Exchange, investors would do well to seek out names that stand to benefit from Seoul’s efforts to stimulate domestic demand. In this environment, outperformance will come from stock-picking, not buying an index.

Shares of South Korea’s banks have lagged this year, reflecting slow growth in loan volumes. But the group appears to have bottomed. In fact, we foresee a recovery in earnings; an uptick in bond yields and steepening yield curve should bolster the industry’s net interest margins. Moreover, the banks’ relatively low loan-to-deposit ratios suggest that the banks have ample liquidity.

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