Kospi 14% Gain Seen as Barclays Predicts Payouts: Korea Markets

By Seonjin Cha

Photographer: Martin Divisek/Bloomberg

Profits at the biggest Korean companies are still falling. Hyundai Motor reported a 29... Read More

Strategists predict the Kospi index will gain the most since 2010 next year as global economic growth picks up, won volatility ebbs and companies boost payouts.
The benchmark gauge for South Korea’s $1.2 trillion equity market will rally 14 percent next year to 2,183 from yesterday’s close, according to the average forecast in a Bloomberg survey of 11 strategists at firms from Barclays Plc to Goldman Sachs Group Inc. The index has retreated 4.5 percent this year, the second-worst among major Asian gauges, after ending little changed in 2013.
Stronger overseas growth may spur demand for products of Samsung Electronics Co. and Hyundai Motor Co. after the nation’s largest exporters struggled to cop with exchange-rate swings against the Japanese yen and the U.S. dollar. The currency has retreated 9 percent through yesterday since
reaching a six-year high against the greenback on July 3. The government is prodding companies to boost dividends that are among the world’s lowest.
“Next year we’re seeing better global macro growth and a more friendly currency environment,” Chanik Park, the Seoul-based head of Korea equity research at Barclays who has a target of 2,300 for the Kospi, said Dec. 10. “Large corporations will start to increase payouts or buy back shares starting from next year. I don’t worry much about 2015.”
Park favors exporters and some companies tied to Chinese consumption, as well as automakers and entertainment shares.

IMF Forecast

His forecast for the Kospi is tied with Goldman Sachs for the highest among strategists surveyed by Bloomberg. The average projection of 2,183 was compiled using the high-end estimate from strategists who provided a target range. The average of seven low-end estimates for the Kospi was 1,863.
The Kospi declined 0.9 percent to 1,904.13 at the close. Samsung Electronics rose 0.5 percent, while Hyundai Motor (005380) was little changed. The won strengthened 1.2 percent to 1,086.44 per dollar.
Exporters should benefit next year as macroeconomic conditions improve and the foreign-exchange rate turns more favorable, according to Song Seong Yeob, head of equity at KB Asset Management Co., which oversees $34 billion in assets.
The International Monetary Fund in October forecast that the global economy will expand 3.8 percent in 2015, up from an estimated 3.3 percent for 2014. Korean exports to the U.S. jumped 29.2 percent in November, while shipments to China climbed 2.3 percent.
The won fell last week versus the dollar to its lowest level since Aug. 22, 2013. One-month implied volatility, a gauge of expected swings in the exchange rate used to price options dropped to 9.45 percent yesterday from this year’s Nov. 20 high.

Won Impact

The weaker currency has helped Samsung Electronics rebound 18 percent from this year’s low on Oct. 21 through yesterday. The stock is still down 7.2 percent in 2014. Hyundai Motor has climbed 16 percent from its Nov. 5 low, trimming this year’s decline to 26 percent.
“I expect next year will be better than 2014,” KB Asset’s Song said by phone from Seoul Dec. 8. “Companies that retreated in 2014 are set to rise amid lower costs and a better won rate.”
A positive reaction by companies to the government’s call to boost dividends will lift equities, Sean Lee, a Seoul-based analyst at Citigroup Inc., wrote in a report dated Dec. 3.
South Korea’s finance ministry on July 24 said it plans to introduce a tax on companies with high cash reserves to encourage bigger dividends, more capital investment and higher wages. The Kospi has a 1.1 percent dividend yield, about half the 2 percent level of the Standard & Poor’s 500 Index.

Money First

Investors want to see evidence of improving earnings and bigger payouts at Korean companies before turning more optimistic toward stocks, according to Scott Seo, the head of Korea equity research at JPMorgan Securities in Seoul.
“Show me the money first,” Seo said in a Dec. 11 interview. “I’m not so bullish about exporters. I think risks remain in the sector and I doubt whether they will be able to report earnings that meet market expectation.”
Profits at the biggest Korean companies are still falling. Hyundai Motor reported a 29 percent drop in third-quarter earnings, while Samsung Electronics posted its smallest quarterly profit in more than two years. While the U.S. economy is accelerating, the euro zone is slowing and Japan has slipped into recession.
“The global competitive environment doesn’t look so easy for next year,” Jong Hak Park, Seoul-based chief investment officer at Baring Asset Management, said in Dec. 9 interview in his Seoul office. He said he prefers transportation stocks, software and semiconductor companies, as well as retailers.

Stock Multiples

Valuations of some large exporters including Samsung Electronics are too cheap to pass up given the prospect of improving profits and higher payouts, said Oh Sung Sik, chief investment officer for Korean equities at Franklin Templeton Investments.
Samsung Electronics trades at 7.4 times reported earnings while Hyundai Motor is valued at a multiple of 6.1. The MSCI All-Country World Index trades at 16.5 times.
“Samsung is undervalued and its earnings have hit the bottom,” Oh said in a Dec. 9 interview in his Seoul office. “If the company shows signs of higher dividends, valuation will also be lifted.”
(An earlier version corrected Scott Seo’s title in 15th paragraph.)