South Korea’s long-standing discount is being whittled away. The stock market hit a fresh record on Tuesday and has now gained 47 per cent this year, leaving even hot performers like Japan and India in the dust. Money continues to pour in, fuelled by expectations of a prolonged re-rating.
That looks rash. Korea is already pricey in historical terms, though it remains one of Asia’s cheaper markets on a 2005 price/earnings multiple of around 11 times. Forecast earnings growth of about 14 per cent next year is run of the mill by Asian standards. And the economic backdrop is mixed. The Bank of Korea is looking for growth of 5 per cent in 2006, up from 3.9 per cent this year, but this suggests inflation and interest rates will be heading higher too. A weaker Japanese yen relative to the Won could sap export growth.
Betting on a further reduction of the equity risk premium looks equally premature. The premium reflects poor corporate governance, meddling by Seoul and a nuclear neighbour. These risks remain.
Rather than counting on a re-rating therefore, foreign investors may want to concentrate on sectors left behind in this year’s rally. The most obvious one is technology, which has remained subdued due to concerns over fourth-quarter profitability at Samsung and its rivals. Alternatively, there are the brokerages, which are riding the current wave of liquidity – and will still collect commissions when the market turns down.
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