Bad News for Kospi Is Good News for Korean Stock Brokers

By Seonjin Cha

Bad news in South Korea has been good news for stock brokerages.
Earnings misses by the nation’s largest companies, faltering consumer confidence, a gyrating won and the withdrawal of stimulus by the U.S. has boosted a gauge of stock-market volatility by 25 percent since the end of May. Bigger price swings spurred a 56 percent increase in volumes, helping the 10 largest brokerages by market value climb an average 11 percent in the past month through yesterday.
Swings in Hyundai Motor Co. (005380) increased to the highest level in three years after the company reported a 29 percent drop in third-quarter profit, while volatility also surged in Samsung Electronics Co. shares. Shinyoung Investment Management Co. says cost
reductions by the brokerage industry will help shelter the firms from a worsening economic outlook.
“Increased volatility and trading volume helped brokers to earn more commissions,” Lee Chul Ho, an analyst at Korea Investment & Securities Co., the third-largest listed brokerage in Korea by market value, said Nov. 12. “Whether investors win or lose, brokers get money as long as trading incurs.”
Samsung Securities Co. (016360), which ranks first by market value, has rallied 11 percent in the past month through yesterday and trades at 19.5 times 12-month estimated earnings. That’s almost double the Kospi’s 10.8 multiple. Hyundai Securities Co. climbed 8.7 percent and trades at 50 times future profits. Yuanta Securities Korea Co. surged 72 percent.

Volatility Index

The 30-day average volume of shares traded on the benchmark Kospi gauge climbed on Oct. 31 to the highest level since April 2013. The Kospi 200 Volatility Index, a gauge of demand for protection against swings in Seoul-listed equities, surged to 18.7 on Oct. 17, its highest level in 16 months, from a record low 10.2 on May 13.
“I expect the volatile market to continue until around early next year,” Lee Jin Woo, fund manager at KTB Asset Management Co., said by phone in Seoul on Nov. 13. “By then, we may have some sense of direction on U.S. rate hike and Europe’s economy.”
The U.S. is tapering its monetary easing while Europe and Japan add further stimulus to ward off deflation. Investors are pricing in that the first U.S. interest-rate increase will come in 10 months, data compiled by Morgan Stanley show.

Earnings Miss

The 30-day historical volatility of Hyundai Motor reached 49 on Nov. 13, the highest level since October 2011. The automaker’s shares slid 9.2 percent on Sept. 18 when the company announced a real estate purchase for three times the property’s assessed value, and rallied the most in more than two years on Oct. 23 as it announced plans for possible interim dividends after earnings (KOSPI) trailed analyst estimates.
Samsung Electronics’ 30-day volatility climbed to 36.7 last week, the highest since July 2013, according to data compiled by Bloomberg. The company posted its smallest quarterly earnings in more than two years.
Asia’s fourth-biggest economy is slowing as demand drops at home and a faltering global economy hurts exporters’ earnings. South Korea’s consumer confidence index fell in October to the lowest level in two months, according to the Bank of Korea, while the monetary authority cut its 2015 growth estimate to 3.9 percent from 4 percent last month. The Kospi has lost 3.4 percent this year through yesterday, compared with a 2.8 percent gain by the MSCI All-Country World Index, while the won has weakened 4 percent versus the dollar.

Momentum Play

While volatility will continue, gains in brokerages are just “a momentum play,” Michael Na, Seoul-based strategist at Nomura Holdings Inc. said by phone on Nov. 12. “For a meaningful re-rating of the sector,” there needs to be an improvement “in macro-economic conditions.”
Hyundai Securities climbed 2.3 percent in Seoul trading at the close today. Yuanta Securities added 2.6 percent and Samsung Securities was unchanged. The Kospi rose 1.2 percent.
Brokers have been taking steps to reduce costs amid a slump in the Kospi, said Huh Nam Kwon, chief investment officer at Shinyoung Investment, which oversees $12 billion in assets.
“We’ve increased holdings in brokerages since last year,” Huh said by phone in Seoul on Nov. 13. “During the weak market, brokers have aggressively lowered costs by trimming staff and branches, helping to improve their profitability. This sector has a long-term growth story.”
South Korea’s 59 brokerages posted their biggest combined quarterly earnings in almost four years on a preliminary basis, the Financial Supervisory Service said Nov. 11. The combined profit of 814.5 billion won ($744 million) was triple that of the previous quarter and compared with a loss the year earlier.
The firms cut employees by 10 percent to 36,972 as of September from a year earlier, the lowest since 2007, and reduced branches by 16 percent to 1,265, FSS data show. Surging income from fixed-income trading also helped lift earnings.
Falling borrowing costs will also boost the industry outlook, said Han Jeong Tae, an analyst at Hana Daetoo Securities Co. The BOK has cut interest rates twice in 2014.
“The overall low-rate condition will draw people into the capital market, which will help earnings for the brokers,” Han said by phone in Seoul on Nov. 12.